Accounts Receivable

What is accounts receivable?

Accounts receivable (AR) represents the money owed to a business by customers for delivered products or services that are yet to be paid for. This value appears as an asset on a company's balance sheet. If AR remains unpaid for an extended period, there is an increased likelihood that the company may need to consider writing off the amount as a bad debt. Managing AR often involves setting credit terms for customers, such as payment deadlines or minimum invoice amounts.

How do you calculate accounts receivable?

Calculating accounts receivable involves a simple process. First, determine the total sales for the period by multiplying the number of units sold by the sales price per unit. Then, subtract the total amount of discounts given during the period from the total sales to derive the net sales. Finally, deduct the total amount of returns and allowances during the period from the net sales to find the accounts receivable.

Difference between accounts receivable and cash

The key distinction between accounts receivable and cash is that accounts receivable is a liability on a company's balance sheet, while cash is not. Accounts receivable signifies the money owed by customers, whereas cash refers to the actual currency and coins held by the company. Additionally, accounts receivable typically take longer to collect compared to cash, impacting a company's liquidity.

Should you turn over your accounts receivable?

The decision of whether to turn over accounts receivable depends on various factors unique to your business. Consider the age of your accounts receivable, the creditworthiness of your customers, the associated costs, and potential benefits. The decision should be carefully weighed based on the specific pros and cons relevant to your business.

Reasons for using or not using a financial model

Financial models serve various purposes, including estimating future company or investment values, evaluating financial impacts of potential transactions, pricing financial products, testing business or investment feasibility, and aiding in decision-making regarding investments. Reasons for not using a financial model may include complexity, inaccurate assumptions, results subject to interpretation, or infrequent updates to reflect current market conditions.