What is Accounts Receivable? – Master of Accounting Degrees

Accounts receivable, often abbreviated as AR, is the term for invoices that have not been paid. It is used, in general, as reference to money that remains outstanding or that is owed to a business by its customers. Receivables is a legal construct with which a company can hold claim. In terms of accounting transactions, AR items are shown on the balance sheet as an asset. Keep reading if you’d like to gain a better understanding of this concept and what it means in the world of both small and big business.

Reasons for AR

Most businesses, whether they offer physical goods or services, offer some form of credit to their customer base. There are several practices that lead to a company having receivables on the books. Some allow only their proven clients to make purchases on credit. Others may set up in a way that all customers receive the company’s offering prior to making payment. Motivation for such an arrangement may be simply for convenience sake or it could be a traditionally accepted practice. Utilities companies are good examples of services that are rendered prior to receiving payment. Until payment is fulfilled in such cases, the outstanding balance is placed in the receivables category.

When Receivables Go Uncollected

Businesses have a number of options when accounts receivable remain unpaid. They can sue the customer with hopes that legal action will motivate the debtor to pay what is owed. Another option is to hire a collections agency to pursue collection of debts. Collections companies either charge a specific fee for their efforts or they will accept a percentage of each debt satisfied. Finally, there are factoring companies.

As a last resort and avenue for receiving quick cash, these companies are attractive because they pay businesses a small percentage of the total debt. In turn, they hope to be able to coerce the full amount owed, or at least a larger portion of it,from the original debtor. An AR that goes unpaid is said to be bad debt. According to IRS guidelines, such bad debt can be removed from reported income if it was reported on a prior tax return.

Accounts Payable Vs. Receivable

You may have heard of the term known as accounts payable and wonder in what way that differs from receivables. Accounts payable is the amount of money that a company owes another for services rendered or products received. It is a debt on behalf of the business itself, and it goes in the negative accounting column. Businesses hire other companies to do work for them or to provide them with goods all the time. It is imperative that payables and receivables be kept separate on the books and that impeccable records be maintained. Doing so ensures that a company has an accurate overview of their receivables, or assets, and their payables, which is the money that is going out.

Now you have an overview of basic accounting practices as they relate to business. Accounts receivable is an integral part of the model many companies follow in order to collect payment.