Accounts receivable (AR) are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. In other words, accounts receivable refer to the outstanding invoices that a company has or the money that clients owe the company. The accounts receivable process involves customer onboarding, invoicing, collections, deductions, exception management, and finally, cash posting after the payment is collected. Accounts receivable is shown in a balance sheet as an asset.

Accounts receivable are created when a company makes a sale on credit but has yet to collect the money from the purchaser. Essentially, the company has accepted a short-term IOU from its client. Accounts receivable are current assets, meaning that the account balance is due from the debtor in one year or less. Many businesses use accounts receivable aging schedules to keep tabs on the status and well-being of AR.

To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable account to account for the payment.

Accounts receivable are an important aspect of a business’s fundamental analysis. Accounts receivable are a current asset, so it measures a company’s liquidity or ability to cover short-term obligations without additional cash flows. The accounts receivable turnover ratio is also called the efficiency ratio, and it shows how efficiently a company manages its assets and capital.

In summary, accounts receivable are the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. They are a crucial part of a companys financial health analysis and are shown as an asset in the balance sheet.