Accounts Receivable

Beginner

Also known as: Trade Receivables

Accounts receivable is the money customers owe a business for goods or services they have received but not yet paid for.

Many businesses sell on credit, allowing customers to pay within an agreed period, such as 30 or 60 days. Until payment arrives, the amount owed is recorded as accounts receivable, a current asset on the balance sheet.

For example, if a supplier delivers goods worth 15,000 to a retailer on 30-day terms, the supplier records 15,000 of revenue and 15,000 of accounts receivable. When the retailer pays, the receivable is replaced by cash.

Receivables are valuable, but they are not cash. If customers pay slowly or not at all, a business can run short of money even while reporting healthy sales. Businesses therefore track how long customers take to pay and chase overdue accounts.

Because some customers will never pay, companies estimate likely losses and record an allowance for doubtful accounts, which reduces the reported value of receivables to the amount expected to be collected.

Note: Trade receivables is another name for accounts receivable, used especially under IFRS. It refers to amounts owed by customers for normal sales.

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