Accounts receivable (AR) are the outstanding amounts owed to a business by its customers for goods or services provided on credit. Essentially, accounts receivable represent the money that a company is entitled to receive from its customers, usually within a specified time frame (e.g., 30, 60, or 90 days).
When a company sells goods or services on credit, it creates an invoice for the customer. The invoice specifies the amount due, the terms of the sale, and the due date for payment. The unpaid portion of these invoices becomes the company’s accounts receivable.
Accounts receivable are considered as current assets on a company’s balance sheet, as they are expected to be collected within a short period of time, typically less than one year. Efficient management of accounts receivable is critical to a company’s cash flow, as it ensures that the company can receive the funds it needs to cover expenses, make investments, or pay its own debts.
Examples of Receivables
Receivables, or accounts receivable, can come in various forms depending on the nature of a business and its transactions. Here are some common examples of receivables:
- Sales on credit: When a company sells goods or services to a customer on credit terms, it creates an invoice that specifies the amount due, the terms of the sale, and the payment due date. The customer is expected to pay the invoice within the specified period. Until the payment is received, the outstanding amount is considered a receivable.
- Loans provided: If a business lends money to another entity, such as a supplier, partner, or employee, the amount lent becomes a receivable until it is repaid. The loan agreement usually outlines the repayment terms, interest rate, and schedule.
- Rent receivables: If a company owns rental property and leases it to tenants, the outstanding rent owed by the tenants is considered a receivable. This can include both residential and commercial rental properties.
- Interest income: If a company has made an interest-bearing investment, such as a bond or a deposit, the interest income that has been earned but not yet received is considered a receivable.
- Insurance claims: When a business files an insurance claim for a covered loss, the claim’s unsettled portion is considered a receivable until the insurance company pays the claim.
- Tax refunds: If a company has overpaid its taxes and is expecting a refund from the tax authorities, the anticipated refund amount is considered a receivable.
- Legal settlements: If a company is awarded a settlement in a lawsuit or legal dispute, the unpaid portion of the settlement is considered a receivable.
These examples illustrate various types of receivables that can arise from different business activities. The common thread among them is that they represent amounts owed to the company that it expects to collect in the future.