The accounting term “accounts receivable” specifies “accounts” a business is entitled to receive because it delivered a service or goods. In other words, it is the exact opposite of accounts payable and represents monies owed by customers to a business for goods or services delivered on credit.
Receivables, as they’re called, are essentially an installment plan a business extends, and each has its own terms that require when payment is due and if interest or late fees will be assessed. The length of time to pay can be anywhere from a few days to a fiscal year.
Why are Accounts Receivable important?
Since there’s a legal obligation for the buyer to pay the debts, accounts receivables are listed as current assets (balance due in one year or less) on a company’s balance sheet. It is an important aspect of a company’s fundamental financial analysis and indicates the amount of liquidity, or ability to cover short-term obligations, the business has without additional cash flows. Analysts often look at accounts receivable in the context of:
- Days sales outstanding, or DSO, which is the average collection time for a company’s receivables balance over a specific period; and
- Turnover ratio, which is the number of times a business has collected on its AR balance during an accounting period.