What is Accounts Receivable?
Accounts Receivable is the value of money customers owe the company for goods and services they purchased. Customers had already ordered and received what they purchased, but haven’t paid for them yet. Said differently, it’s the money the company can collect from customers in the future for products it has already provided. If a company has $400 million of Accounts Receivable, it means the company has yet to collect $450 million from customers for products it has already provided.
Accounts Receivable arise because large companies, especially those in the B2B space, don’t pay at the time of purchase. There’s often days to weeks of gap in between when customers receive the order and when they pay for them. Whereas consumers would pay at the point of purchase, large companies would pay 30-90 days later. Some might even extend into the 180 day timeframe. This time lag creates Accounts Receivable.
When customers buy things without paying for them, we say that they’re buying on account. The company hasn’t received cash for these accounts but it’ll eventually receive the cash payments. Hence, the accounts are receivable. Therefore, we call it “Accounts Receivable”.
Accounts Receivable is a Current Asset on the Balance Sheet. It’s an Asset because it represents money the company can collect in the future. Remember, it’s the money customers owe the company. Not the other way around. The customers are the ones who will pay money to the company. Therefore, it’s an Asset to the company. Specifically, it’s a Current Asset because customers usually pay within 30-90 days. Since the company can collect cash payments within a year, it’s a Current Asset.