Accounts Receivable

Definition

Accounts receivable is an asset account on the balance sheet representing money owed to a company by its customers for goods or services delivered but not yet paid for. It plays a critical role in managing cash flow and is closely monitored in financial statements as it reflects the company’s efficiency in collecting payments and its overall liquidity.

5 Must Know Facts For Your Next Test

1. Accounts receivable is classified as a current asset because it is expected to be collected within one year.
2. The aging of accounts receivable analysis helps businesses assess how long invoices have been outstanding and identify potential collection issues.
3. Accounts receivable can be affected by terms of sale, which dictate when payment is due and can influence customer payment behavior.
4. Establishing an allowance for doubtful accounts helps companies prepare for potential losses from uncollectible accounts receivable.
5. A higher accounts receivable turnover ratio indicates a company is more efficient at collecting payments from its customers.

Review Questions

• How does accounts receivable impact a company's cash flow and liquidity management?
  • Accounts receivable directly affects a company's cash flow since it represents funds that are owed but not yet received. Effective management of accounts receivable ensures timely collections, which improves liquidity and allows the business to meet its short-term obligations. A healthy accounts receivable balance indicates that the company is generating sales on credit while also maintaining efficient collection practices, leading to better overall financial health.
• Discuss the role of accounts receivable in the classified balance sheet and how it relates to current assets.
  • In a classified balance sheet, accounts receivable appears under current assets, reflecting amounts due from customers that are expected to be collected within one year. This categorization helps stakeholders evaluate the liquidity position of the company by providing insights into how quickly it can convert its assets into cash. The presentation of accounts receivable alongside other current assets like cash and inventory allows for a clearer picture of short-term financial health and operational efficiency.
• Evaluate how establishing an allowance for doubtful accounts influences the overall financial statements of a company and what implications it may have for future operations.
  • Establishing an allowance for doubtful accounts impacts both the balance sheet and income statement by reducing the net realizable value of accounts receivable and recognizing bad debt expense. This practice leads to more accurate financial reporting by anticipating potential losses from uncollectible debts. Moreover, it can affect future operations by highlighting collection issues that may require management attention or adjustments in credit policies. A consistent evaluation of this allowance ensures that the company's financial health is transparently communicated to investors and stakeholders.

Related terms

Current Assets:

Current assets are assets that are expected to be converted into cash or used up within one year, including cash, accounts receivable, and inventory.

Revenue Recognition: Revenue recognition is an accounting principle that determines when revenue should be recognized in the financial statements, typically when goods or services are delivered to customers.

Bad Debt Expense: Bad debt expense represents the amount of accounts receivable that is estimated to be uncollectible, impacting the company's income statement.