What is accounts receivable?

What is Accounts Receivable

Accounts Receivable - What is it and why is it important?


Accounts receivable (A/R) represents the credit sales of a business.

In other words, it's the amount of money that customers owe the business for goods and services that have been delivered but not yet paid for.

An A/R aging report is a listing of all unpaid invoices, sorted by the length of time they have been outstanding.

From a financial standpoint, managing accounts receivable is critical to maintaining positive cash flow and keeping the business afloat.

In this blog post, we'll take a closer look at what accounts receivable is, how it's different from accounts payable, why managing A/R is so important, and some best practices for keeping on top of receivables.


What is Accounts Receivable?

As we mentioned above, accounts receivable (A/R) represents the credit sales of a business. In other words, it's the amount of money that customers owe the business for goods and services that have been delivered but not yet paid for.

Trade Debtors is another term that you might have heard and it means exactly the same thing as accounts receivable.

Accounts Receivable sits in the current assets section of the Balance Sheet.


How Is Accounts Receivable Different from Accounts Payable?


Accounts payable (A/P) represents the money that a business owes to suppliers for goods and services that have been received but not yet paid for. Also known as Trade Creditors.

In other words, it's the opposite of accounts receivable— instead of customers owing money to the business, the business owes money to suppliers.

Both A/R and A/P are important to manage effectively, but they serve two different purposes. While A/R gives you an idea of how much money is coming in, A/P tells you how much money is going out.

 
As you can see, managing both accounts receivables and account payables are vital to ensuring your business has positive cash flow.

Positive cash flow means that your company has enough money on hand to cover its short-term expenses—and if you're bringing in more money than you're spending, that's even better!

 

Why Is Managing Accounts Receivable So Important?


There are a few reasons why managing A/R is so important:

 
1. It ensures that your company has positive cash flow. As we mentioned above, positive cash flow is essential to keeping your business afloat.

 
2. It helps you keep track of which customers still need to pay their invoices. This information can be useful when following up with customers or when making decisions about extending lines of credit in the future.

 
3. It allows you to see which invoices are overdue. This information can help you prioritise which customers need to be contacted first so that you can get paid in a timely manner.

 
4.It gives you an idea of how efficiently your business is collecting payments from customers.  This information can help you identify any potential problems with your billing or collections process so that you can make changes as needed.


As a small business owner in the UK, it's important to understand what accounts receivable is and why managing receivables effectively is so important to the success of your business.

We hope this blog post has given you some insights into what A/R is and how it differs from accounts payable. Managing both types of accounts effectively will help ensure your company has positive cash flow—which is essential to keeping your business running smoothly! 

Here is an example of what the balance sheet looks like and you can see I have highlighted where Accounts Receivable (Trade Debtors) appears:

What is accounts receivable


The Balance Sheet is a snapshot in time - so above we are showing it at 30th April 2018 - that means that as at 30th April 2018, the number shown is the amount of money that this company has owned to it, by its customers/clients.

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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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