What is Accounts Receivable?

    • Accounts receivable is referred to the money that is due to the seller of products from the buyer who purchased the products. This is also known as credit sales. An invoice is issued to the buyers from the seller, which is endowed as the seller has given products on credit to the consumer. The amount of credit allowed per consumer is pre-decided and is known as a credit limit. This is based on creditors' goodwill, credit history, and purchase frequency. In case the seller fears incurring unforeseen losses, he may decide to reduce the credit limit of the creditor.
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  • Uncollected debt – High A/R that remains uncollected for a longer period of time that is expected never to be returned by the creditor is written off as bad debt. This situation occurs when consumers who purchase goods on credit go bankrupt or otherwise do not pay the credit due. 
  • Cash flow deficiencies – A business requires cash to manage its daily operations. Selling on credit may support revenue and income to hike, but it offers no actual inflow of cash. In the short term, it is viable, but it can cause the company to run short of liquid cash in the long term. 


Where do I find accounts receivable?


Accounts receivable are seen under your prepared balance sheet or daily accounts under the 'current assets' section. Accounts receivable are termed an asset because they add value to your company as future payments are received. 


Accounts Receivable vs Accounts Payable


When a company shall pay money and is under the debt of its suppliers or associated sellers, this situation is accounts payable. Accounts payable are the exact opposite of accounts receivable. To explain it, let us imagine Company A sells Company B carpets and sends a bill for the purchases done. Company B owes company B money, so they record it as accounts payable. Company A is the receiver of the money, so they record the bill as accounts receivable. 


Difference Between Accounts Receivable and Accounts Payable



Accounts Receivable

Accounts Payable


Accounts receivable is referred to the money that is due to the seller of products from the buyer who purchased the products. This is also known as credit sales.

When a company owes money and is under the debt of its suppliers or other parties, this situation is termed as accounts payable. Accounts payable are the exact opposite of accounts receivable.


Accounts receivable are termed as current asset accounts. 

Accounts payable represent the liability of the company.


They are recorded in the balance sheet under assets.

They are recorded in the balance sheet under liabilities.


E.g. Money from creditors

E.g. Accrued expenses


Benefits of Accounts Receivable


Accounts receivable is an important aspect in influencing the businesses' fundamental analysis. Accounts receivable is a current asset, so it helps measure a company's liquidity or its ability to cover short-term liabilities without additional cash flows. 

Analysts often evaluate accounts receivable in the reference of turnover, termed as accounts receivable turnover ratio. This measures the number of times a company has collected its accounts receivable balance during an accounting period. Further analysis also includes a particular day sales outstanding, which measures the average collection period for a firm's account receivables balance for a specified period.


What Happens If Customers Never Pay What's Due?


When the company knows that credit of an account receivable will not be getting paid by a consumer, it is written off as a bad debt expense.


Account Receivable Turnover


In case you want to calculate the accounts receivable turnover, the following are the steps.

  1. Start by adding the beginning and ending accounts receivable.
  2. Divide it by 2 to calculate the average accounts receivable for the given period.
  3. Take that figure and divide it into the net credit sales for the year for the average accounts receivable turnover. 

The formula will turn out as follows:

  1.  Beginning accounts receivable + ending accounts receivable / 2 = net accounts receivable
  2.  Net credit sales / accounts receivable = accounts receivable turnover


Journal Entry for Accounts Receivable


Let us take an example. XYZ Ltd sold some truck parts to Mr. P on credit since XYZ has incurred several expenses like the cost of goods sold (COGS) for the sales he made but has not yet been paid.

When Mr. P P pays off his invoice amount, the accounts-receivable account will get written off against payment received in cash. Also, if payment is not received or is not expected to be received anytime in the future, then considering it to be a loss, the seller will write this off as bad debt.

Let’s elaborate on the above example of XYZ Ltd and form a journal entry for accounts receivable.

On Jan 1, 2022, XYZ ltd sold some machinery parts to Mr. P on credit. The calculated amount of the invoice, including all expenses and taxes, was $10000 and was supposed to be paid off on or before Jan 31, 2022. Mr. P made the full payment of $10000 on Jan 28, 2022.







Account receivable a/c....dr



                  To  Sales a/c




(being goods sold to Mr. P on credit)








Cash a/c..................................dr



      To account receivable a/c




(Being payment received)



Recording credit sales if XYZ provides credit terms to its customers. Consider credit terms as 2/10 net 30, i.e., if payment is made within 10 days, a discount of 2% is offered to the creditor or else the payment should be paid within 30 days without any discount.







Cash a/c.................................dr



Sales a/c................................dr



    To account receivable a/c




( being payment received after allowing Mr. P 2% discount)



Mr. P pays his amount on Jan 8, 2022, and avails of the discount.


Journal for Writing Off Bad Debt





Bad debts a/c..........dr



To accounts receivable a/c