Accounts receivable definition
The term accounts receivable, or ‘AR’, relates to payment(s) that one company expects to receive from another. When a company purchases something from another company but doesn’t immediately pay for it, the selling company will record this transaction as accounts receivable.
This essentially means the selling company has sold its good or services ‘on credit’ on the condition that the buying company will pay back what is owed within a certain time frame.
AR will be listed as a current asset on a selling company’s balance sheet, because the company is expecting to be paid that amount. When the selling company sets up an accounts receivable to record the fact that they are owed money, the buying company is equally expected to set up an accounts payable to reflect the fact that they are due to pay the amount they owe.
As selling companies are essentially extending credit to the purchaser on the proviso that they will be paid back by a particular date, this does come with an element of risk as there’s always a chance the buyer won’t be able to pay back what they owe. Sellers should therefore be careful about how much they rely on accounts receivable.
We have a detailed glossary of accounting terms to keep you in the know, which you can see here.
