Definition: Accounts receivable are amounts that customers owe for purchases that they made on credit with a company. In other words, it’s the amount of money customers owe a business for credit sales.
What Does Accounts Receivable Mean?
What is the definition of accounts receivable? Most companies have an A/R system that allows customers to purchase goods or services on credit and pay cash for them at a later point in time. This strategy can increase sales, build customer relationships, and even create consumer loyalty. Even though these advantages are strong, companies must evaluate each customer on an individual basis to see if they are trustworthy enough to extend credit terms.
If the customer proves to be creditworthy, the advantages of creating an account for them will outweigh the risk that the customers will default on the purchase and the company won’t receive its payment.
Accounts receivable is recorded as a current asset on the balance sheet and is often viewed as one of the most liquid assets a company can own. Let’s take a look at an example of how to record a credit sale.
Example
Freidman, PC is a CPA firm that specializes in tax and consulting and allows its clients to pay on account. When a tax return is finished, Friedman sends an invoice to the client with credit terms that allow the client to pay the bill within 30 days.
On the day the tax return is finished and the invoice is printed, Freidman would debit account receivables and credit the revenues account for the job. Recording this entry agrees with the matching principle of accrual accounting because revenues are recorded when they are earned instead of being recorded when they are collected.
When the client pays his invoice, Freidman would record the payment by debiting cash and crediting the receivables account. This way the A/R balance is cleared out and the revenues recorded equals the cash received.
Summary Definition
Define Accounts Receivable: Receivables means the money that customers owe a business for purchasing goods or services on credit.
