Definition of Accounts Receivable
Accounts Receivable (AR) is when a business is owed money for payment of an order for services or good that was bought using credit. Whenever services are rendered and charged, a vendor is probably an unsecured creditor for their customer. An accounting entry for this service is shown on a balance sheet in current or short-term assets. These accounts are sometimes called trade receivables.
How are Accounts Receivable Recorded on Balance Sheets?
If a business has accounts receivables, it means sales have been made using credit, however, they haven’t been paid by the buyer yet. The balance remaining in the accounts receivable account contains all unpaid sales. Therefore, this is an asset, as it can be turned into cash at a upcoming date. Basically, the business has allowed their customer to make a short-term IOU.
Businesses record their accounts receivables as assets on their balance sheets as a legal obligation exists for their customer to pay this debt. Also, all accounts receivable are current assets, denoting the balance on the account is due from the customer in one year or less. If the accounts receivable total only changes to cash after a year, it gets recorded as a long-term asset instead, i.e. as a possible note receivable.
To record any sales on an account, the business must debit a receivable and credit a revenue account. As soon as the client pays the account off, the business deducts cash and the recorded receivable is credited. The resulting balance recorded onto the accounts receivables trial balance sheet is generally a debit.
Because there’s a chance a few receivables never get paid, these accounts are offset (when done under the accrual type of accounting) by making an allowance for doubtful accounts; this type of allowance comprises an approximation of the full amount of any bad debts associated to the receivables asset.
Under conditions when a business doesn’t extend credit to anyone – all sales get paid for in cash at the time of purchase – the business doesn’t have any accounts receivables.