What Is Accounts Receivable?

For many businesses that get paid through invoices or bills, accounts receivable is critical for understanding the overall financial health of your company.

What Is Accounts Receivable?

Accounts receivable is money owed to your company, typically because you are sold a good or provided a service and are awaiting payment. If you don’t receive cash for your good or service at the point of sale, the amount is added to your accounts receivable account. Most commonly, accounts receivable occurs in the form of outstanding invoices or bills.

Most businesses have some form of accounts receivable, even if you operate as a sole proprietorship. You will become very familiar with accounts receivable, sometimes abbreviated as AR, if you are a freelancer who gets paid via invoices or if you sell goods on credit.

Is Accounts Receivable Revenue?

In an accounts receivable situation, you don’t actually immediately possess the cash earned from goods sold or services performed. In a simplistic sense, accounts receivable amounts to an IOU.

Because of this, accounts receivable is actually an assets account, not revenue. It is considered a current asset because you expect that you will be paid within a year. As an asset, accounts receivable adds value to your company because it is money that will be inflowing to your business in the future.

What’s the Difference Between Accounts Receivable and Accounts Payable?

The opposite of accounts receivable is accounts payable, which is a liability. This is money your company owes others, such as if you have invoices that you need to pay.

Why Is Accounts Receivable Important?

Accounts receivable is critical because it reveals how much money you should expect to earn in the future. If you are paid primarily through invoices, this figure is directly linked to your overall income.

One factor that you need to pay attention to is the age of your accounts receivable. Are you getting paid on schedule? Are your customers or clients waiting too long to pay invoices? You will commonly have to send reminders if your accounts receivable is getting too old. Lenders will look at how your accounts receivable ages when making funding decisions.  

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