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Accounts receivable (or “AR” for short) refers to money that will be paid to a company or individual by its customers at a future date in exchange for goods or services that have been provided by said company or individual.
Accounts receivable are shown under the current assets section of a company’s balance sheet.
Yes, accounts receivable are considered current assets because they represent money, in the form of credit, that will be paid to the company in the short term (typically within 30, 60 or 90 days).
Whether accounts receivable counts as revenue depends on the method of accounting in use by a company. Under the cash basis of accounting, accounts receivable are not considered revenue since they are credit, not cash. But under the accrual basis of accounting, accounts receivable are considered revenue because the cash will eventually be paid to the business.
Accounts receivable turnover ratio is one of the most important metrics for measuring financial efficiency within an organization. In short, accounts receivable turnover ratio measures how efficiently an organization collects payments from its customers. The higher your accounts receivable turnover ratio, the better you are at collecting payments and getting your customers to pay their invoices on time.
The formula to calculate your accounts receivable turnover ratio is:
Accounts receivable turnover ratio = net credit sales / average accounts receivable
When your company issues an invoice for goods or services that have been sold to a customer, the dollar amount on the invoice that is expected to be paid is classified as accounts receivable. Accounts payable is simply the opposite. When your company purchases goods or services and receives an invoice, the dollar amount you owe is classified as accounts payable.
Bad debt is bad news. It refers to credit that can no longer be collected, and thus has to be written off. There are many reasons why credit may not be collectable, such as a company going bankrupt. Once credit has been identified as bad debt, it is removed from the accounts receivable section on a company’s balance sheet.
Accounts receivable is a critical part of the account reconciliation process. It consists of matching the accounts receivable total in a company’s general ledger with the unpaid amounts from customers. There are solutions that automate account reconciliation for finance teams.
For finance and accounting teams who use Excel, there are solutions that automate the account reconciliation and financial close processes.