Accounts receivable

Definition

Accounts receivable represent money owed to a business by its customers for goods or services delivered but not yet paid for. They are considered a current asset on the balance sheet as they are expected to be converted into cash within one year.

5 Must Know Facts For Your Next Test

1. Accounts receivable are recorded when a sale is made on credit.
2. They are classified as current assets because they are generally expected to be collected within one year.
3. Managing accounts receivable efficiently can improve a company's liquidity and cash flow.
4. The allowance for doubtful accounts is used to estimate the portion of receivables that may not be collectible.
5. Financial ratios such as the accounts receivable turnover ratio help assess how efficiently a company collects its receivables.

Review Questions

Related terms

Current Assets:

Assets that are expected to be converted into cash or used up within one year.

Revenue Recognition Principle:

An accounting principle that dictates revenue should be recognized when it is earned and realizable, regardless of when payment is received.

Accounts Receivable Turnover Ratio:

A financial ratio that measures how many times a company collects its average accounts receivable during a period.