Account Receivable

A current asset account tracking money owed to a business by customers who purchased goods or services on credit. These amounts typically represent short-term extensions of credit and form a crucial component of a company's working capital. Accounts receivable directly impact cash flow and serve as an indicator of a company's credit management effectiveness.

For example, a wholesale distributor sells $100,000 of office supplies to various businesses on 45-day payment terms. While the revenue is recognized immediately, the distributor must manage these receivables through careful credit checking, prompt invoicing, and systematic follow-up procedures to ensure timely collection and maintain healthy cash flow.

Managing accounts receivable requires balancing customer relationships with financial prudence through appropriate credit policies, collection procedures, and aging analysis. This account interacts closely with concepts like the allowance for doubtful accounts, days sales outstanding, and working capital ratios. The effectiveness of receivables management can significantly impact a company's liquidity position and overall financial health.