What is Accounts Receivable?
Accounts receivable, or AR, is the term used to describe a company’s expected receipt of payment for goods or services provided to clients. The money that your clients owe you, typically in the form of bills, is known as your account receivable (AR). The reverse of accounts payable, or AP, is when you owe money to another party. Legally binding ARs must be paid within the allotted time period. The balance sheet of a firm will include AR as an asset in the section under Current Assets.
Difference between Accounts Receivable and Accounts Payable
Accounts receivable (AR) is considered an asset because you’re counting on receiving that money within the timeline defined when the sale was initiated. AP is considered a liability because you will need to pay out that amount within a certain timeline. AR is considered as an income unless written off and AP is considered as liability until paid. AR is vendor’s record in a firm whereas AP is a client’s record.
Importance of Accounts Receivable
Managing accounts receivable involves planning and maintaining debt owing to the client due to credit sales. You must manage “how much you need to receive?” from “whom?” till your sales are converted to cash.
To accomplish this, you must have an established accounts receivables management system, often known as a credit management system.
Another reason is that given the magnitude of credit sales, accounts receivables are one of the primary sources of cash inflow, and a significant sum of money is locked up in them. This merely suggests that until it is paid, a large amount of money will not be available. If these are not adequately handled, it directly affects the company’s working capital and can prevent it from expanding. On the other hand, effective accounts receivable management has numerous advantages for the company.
- The most significant of these is the higher cash influx caused by, the quicker conversion of sales to cash.
- Eliminating inconsistencies in pending bills also helps you improve your relationship with your customers and reduces the chance of bad debts.
- All these require you to be on top of your account receivables, which you can do easily if you use accounting software.
- It enables you to track, keep an eye on, and take prompt action on past-due or long-pending debts, increasing the cash flow necessary for business expansion.
