any money owed by your customers for goods or services delivered to them or the money due for goods and services that have been delivered but not paid for yet.
Account Receivable Details
Nowadays, due to the pressure coming from competitors, businesses sell to their customers on credit to get a leg up on their competition (i.e. they will deliver the goods and services immediately and then get paid a few weeks later). They keep track of all the money that their customers owe them using an account in their books called "account receivable." When the money is received a few weeks later, it is then recorded as an asset in the company’s balance sheet.
When customers receive these goods or services, it normally comes with a term or an amount of time given for the money to be paid. It can be within 2 weeks, 30 days, 60 days, or 90 days, depending on the credit history of the company with the customer. This is usually stated clearly on the invoice issued by the company at the point of delivery of the goods or services. However, if some of your customers are unable to pay as stipulated or agreed, the company will run into debt or loss at the end of the year.
Therefore, before you sell your goods on credit to any customer, it is important to check their credit history to be sure you will get your money. If your business normally delivers goods and services to customers without payment at the time of purchase, you need to consider the values of your receivable turnover ratio and the average sales/credit period. These two terms will help you decide whether to continue or to stop selling out on credit; if the value of the first is big and the value of the second is small, then you can continue doing so.
Example of Account Receivable
Let’s assume that Mr. Michael wants to buy $3,000 furniture for his hotel but doesn’t have that amount at the time of sale. The furniture seller will then allow him 30 to 60 days to pay off his debt. At that time, the seller would record the $3,000 on their account receivable, but when Mr. Michael pays the debt, that amount will then be recorded as sales.
Accounts Receivable vs Accounts Payable
These two types of accounts are very similar in the way they are recorded, and most times confusion does arise when you're working between accounts receivable and accounts payable. Therefore, it is important to know that one of them is normally recorded in an asset account while the other is recorded in a liability account.
Generally, in accounting, accounts receivable and accounts payable are opposite of each other. For instance, when Company A buys goods from Company B and Company B sends them a bill, Company A owes Company B; hence they will record this debt in their accounts payable column. Company B will wait to receive the money from Company A, and they will record the bill in their accounts receivable.