Accounts Receivable Meaning & Definition

What is Accounts receivable?

Accounts receivable is a measure of a company's ability to generate revenue and manage cash flow. When customers purchase goods or services on credit, they are essentially taking out a loan from the company. This loan must be repaid within a certain timeframe, which is typically spelled out in the terms of the sale.

What are the three types of account receivable?

Accounts receivable is a crucial part of a company's finances, representing the money owed to the company by its customers for goods or services that have been sold on credit. There are three main types of accounts receivable, each with its own unique characteristics and implications for a company's finances.

1. Trade Accounts Receivable:

   Trade accounts receivable is the most common type of accounts receivable, representing the money owed to a company by its customers for goods or services that have been sold on credit as part of the normal course of business. These are typically short-term receivables, with payment due within 30-90 days of the sale. Managing trade accounts receivable effectively is essential for maintaining a healthy cash flow and avoiding the risk of bad debt.

2. Non-Trade Accounts Receivable:

   Non-trade accounts receivable refers to money owed to a company by parties other than customers, such as employees or suppliers. This type of receivable may arise from situations such as advances made to employees or insurance claims that have not yet been settled. Non-trade accounts receivable may have longer payment terms than trade accounts receivable, and may require different collection strategies.

3. Accrued Accounts Receivable:

   Accrued accounts receivable refers to revenue that has been recognized but not yet invoiced to the customer. This can occur in situations where ongoing services are provided over a period of time, such as in a subscription-based business model. Accrued accounts receivable may not have a specific payment date, and may require careful tracking to ensure that revenue is recognized appropriately in the company's financial statements.

Is accounts receivable a credit or debt?

Accounts receivable is a credit, not a debt. It represents the money that a company is owed by its customers for goods or services that have been sold on credit.

The accounts receivable balance is an asset on the company's balance sheet, representing money that is expected to be received in the future. As the customer makes payments on their outstanding balance, the accounts receivable balance decreases and the company's cash balance increases.

While accounts receivable is a credit, it can also represent a risk for the company in the form of bad debt. If a customer is unable or unwilling to pay their outstanding balance, the company may need to write off the debt as a loss on their financial statements. Managing accounts receivable effectively is therefore crucial for maintaining a healthy cash flow and minimizing the risk of bad debt.

Why is accounts receivable important?

Accounts receivable is a crucial aspect of a company's financial operations. 

Here are some reasons why accounts receivable is important:

1. Cash Flow Management:

   Accounts receivable is essential for managing a company's cash flow. When a sale is made on credit, the revenue is recognized immediately, but the cash is received at a later date. Accounts receivable represents the money that is expected to be received from customers, and managing this balance effectively is crucial for maintaining a healthy cash flow.

2. Revenue Recognition:

   Accounts receivable also plays a key role in revenue recognition. When a sale is made on credit, the revenue is recognized immediately, even though the cash has not yet been received. By tracking accounts receivable balances, a company can ensure that revenue is recognized appropriately and in accordance with accounting standards.

3. Customer Relationships:

   Managing accounts receivable also plays a role in maintaining positive customer relationships. By invoicing customers promptly and following up on overdue payments, a company can demonstrate its commitment to customer service and ensure that customers are satisfied with their experience.

4. Risk Management:

   Accounts receivable also poses a risk for a company in the form of bad debt. When customers are unable or unwilling to pay their outstanding balances, the company may need to write off the debt as a loss on their financial statements. Effective management of accounts receivable is therefore crucial for minimizing the risk of bad debt and protecting the company's financial health.

How do you manage accounts receivable?

Managing accounts receivable is an important aspect of maintaining a healthy cash flow and protecting a company's financial health. Here are some key strategies for managing accounts receivable effectively:

1. Establish Clear Payment Terms:

   Clear payment terms help to ensure that customers understand when payments are due and can help to prevent disputes over late payments. 

2. Invoice Promptly:

   Invoicing customers promptly can help to ensure that they pay their outstanding balances on time. It's important to send invoices promptly and to follow up on any overdue payments.

3. Monitor Aging Receivables:

   Monitoring aging receivables helps to identify which customers are overdue on their payments and how much they owe. This information can be used to prioritize collections efforts and to identify any customers who may be at risk of defaulting on their payments.

4. Follow Up on Overdue Payments:

   Following up on overdue payments is essential for managing accounts receivable effectively. This can involve sending reminders or making phone calls to customers who are behind on their payments. By following up consistently, companies can demonstrate their commitment to collecting outstanding balances and maintain positive customer relationships.

5. Implement a Collections Strategy:

   Implementing a collections strategy can help to ensure that overdue payments are collected promptly and in a consistent manner. This can involve establishing a process for escalating collections efforts as payments become more overdue.

6. Monitor Cash Flow:

   Monitoring cash flow is essential for managing accounts receivable effectively. By tracking accounts receivable balances and cash inflows, companies can identify any potential cash flow issues and take action to address them before they become a problem.

Accounts receivable dashboard provides you with a snapshot of all key AR metrics that your business needs to track. It keeps you updated about defaulting customers, cash stuck in different aging buckets, days sales outstanding (DSO), and collector effectiveness index (CEI).

Use our free Accounts Receivable Dashboard and stay on top of your invoices and accounts. Try out this Excel template to get a feel of how AR automation dashboards work.

Why is accounts receivable important?

Accounts receivable is a crucial aspect of a company's financial operations. 

Here are some reasons why accounts receivable is important:

1. Cash Flow Management:

   Accounts receivable is essential for managing a company's cash flow. When a sale is made on credit, the revenue is recognized immediately, but the cash is received at a later date. Accounts receivable represents the money that is expected to be received from customers, and managing this balance effectively is crucial for maintaining a healthy cash flow.

2. Revenue Recognition:

   Accounts receivable also plays a key role in revenue recognition. When a sale is made on credit, the revenue is recognized immediately, even though the cash has not yet been received. By tracking accounts receivable balances, a company can ensure that revenue is recognized appropriately and in accordance with accounting standards.

3. Customer Relationships:

   Managing accounts receivable also plays a role in maintaining positive customer relationships. By invoicing customers promptly and following up on overdue payments, a company can demonstrate its commitment to customer service and ensure that customers are satisfied with their experience.

4. Risk Management:

   Accounts receivable also poses a risk for a company in the form of bad debt. When customers are unable or unwilling to pay their outstanding balances, the company may need to write off the debt as a loss on their financial statements. Effective management of accounts receivable is therefore crucial for minimizing the risk of bad debt and protecting the company's financial health.

4 examples of accounts receivable?

Examples of accounts receivable can vary depending on the nature of the business, but here are some common examples:

1. Invoiced Sales:

   One of the most common examples of accounts receivable is the money owed by customers for goods or services that have been invoiced. This is often seen in B2B (business-to-business) companies, where customers are given payment terms of 30, 60, or 90 days. For example, if a company sells $10,000 worth of products to a customer on 60-day payment terms, they will have an accounts receivable balance of $10,000 until the customer pays the invoice.

2. Subscription Services:

   Companies that offer subscription-based services, such as streaming services or software-as-a-service (SaaS) companies, often have accrued accounts receivable. This means that the company recognizes revenue as the service is provided, but does not invoice the customer until a later date. For example, if a SaaS company provides a customer with access to their software for a month, they will recognize the revenue for that month but will not invoice the customer until the end of the month.

3. Advances:

   Companies may also have accounts receivable related to advances made to customers. For example, a company may require a deposit or prepayment for a custom order or a large project. The deposit or prepayment would be recorded as an accounts receivable until the customer pays the remaining balance.

4. Insurance Claims:

   In the healthcare industry, insurance claims can create accounts receivable for medical providers. When a patient receives medical treatment, the provider bills the patient's insurance company for the cost of the treatment. The insurance company is responsible for paying the provider for the covered services, but this payment may not be received until weeks or months after the treatment is provided.

How do you calculate accounts receivable?

Calculating accounts receivable is a straightforward process that involves adding up the total amount of money that is owed to a company by its customers for goods or services that have been sold on credit. 

Here are the steps involved in calculating accounts receivable:

1. Identify the Invoiced Sales:

   The first step in calculating accounts receivable is to identify the total amount of sales that have been made on credit. This includes any goods or services that have been invoiced to customers and for which payment is due at a later date.

2. Determine the Payment Terms:

   Next, it's important to determine the payment terms for the sales that have been made on credit. This includes the length of time that customers have to pay their outstanding balances, which can range from 30 to 90 days or more.

3. Calculate the Accounts Receivable Balance:

   To calculate the accounts receivable balance, simply add up the total amount of money that is owed by customers for the sales that have been made on credit. This includes any outstanding invoices that have not yet been paid, as well as any accrued revenue that has not yet been invoiced.

For example, if a company has made $100,000 in sales on credit, with payment terms of 60 days, and has $20,000 in accrued revenue that has not yet been invoiced, the accounts receivable balance would be calculated as follows:

Total accounts receivable balance = $100,000 (invoiced sales) + $20,000 (accrued revenue) = $120,000

How to automate your accounts receivable?

The need to accelerate digital initiatives for finance operations is now more than ever. While you may have little control over the economy, you can certainly react and take the necessary steps to ensure the revenue impact on your business is low. 

By infusing autonomous finance in your AR process, you can drive productivity, ensure better alignment within the AR department, and leverage actionable insights for better decision-making. 

HighRadius AI powered Autonomous Receivables Software can help you to bolster up your AR to not only weather economic volatility, but also ensure sustained success.