Accounts Receivable (AR): Definition & Examples
Accounts Receivable is an asset on a company’s balance sheet, and it represents money customers owe you.
What is Accounts Receivable?
Accounts receivable represents money customers owe you for goods or services you already delivered but have yet to get paid for. Accounts receivable are listed on the balance sheet of a company as a current asset. Accounts receivable may sometimes be referred to as "AR".
Accounts Receivable vs Accounts Payable
Accounts receivable is when a company is owed money, while accounts payable is when the company owes money. In short, accounts payable is the opposite of accounts receivable.
Accounts payable is listed as a current liability on the balance sheet as it’s something a company owes, while accounts receivable is listed as a current asset on the balance sheet as it is something that is owed to a company.
To illustrate, suppose a retail store purchases furniture from a manufacturer for $5,000. The furniture is delivered to the store, and the store now has 60 days to pay the manufacturer for the furniture. During the period when the retail store hasn’t paid, the retail store will have accounts payable for $5,000, while the manufacturer will have accounts receivable for $5,000. Once payment is received, the retail store will have a decrease in accounts payable of $5,000, while the manufacturer will have a decrease in accounts receivable of $5,000.
Is Accounts Receivable an Asset?
Yes, Accounts Receivable (AR) is an asset under the company’s balance sheet. More specifically, it is a current asset. In the image below, you can see Microsoft’s real balance sheet, where accounts receivable is inside the current assets section after cash and before inventories.
Under accounts receivable, it also says “net of allowance for doubtful accounts”. Microsoft defines the allowance for doubtful accounts as:
“our best estimate of probable losses inherent in the accounts receivable balance”
In other words, they account for the risk that some accounts receivables may not be paid based on their historical trends and known troubled accounts. To see Microsoft’s full annual report, click this link.
Risk of Accounts Receivable
As we saw in the Microsoft example above, there are risks associated with accounts receivable. Specifically, there are two types of risk:
- Bad Debt: customers who purchased the goods or services on credit may not be able to pay for them when they're due. This is either due to them not wanting to pay, or because they have gone bankrupt and thus are unable to pay.
- Cash Flow: while selling on credit increases a company’s revenue, it does not increase a company’s cash inflows. Therefore, increasing accounts receivables that are not being converted into cash quickly can result in a company being unable to meet its short-term obligations due to a lack of cash flow.
When an account receivable is not paid by a customer past the deadline, it is written off as a bad debt expense.
Accounts Receivable Examples
Examples of transactions where accounts receivables arise include:
- Clothing manufacturer delivered products to a retail store. Payment is due to the manufacturer within 30 days.
- Customer paying at a retail store with a credit card.
- Electricity provider delivers electricity for the month but gets paid at the start of the following month.
- Landlord allows Company A to pay $3,000 in office rent at the end of each month. During the month, the landlord has an accounts receivable.
Is Accounts Receivable a Debit or Credit?
Accounts receivable is a debit because it is an increase in assets. On the other hand, accounts payable is a credit because it is an increase in liabilities.
For example, suppose Sony sold $10,000 worth of TVs to Walmart. Sony already delivered the TVs and payment by Walmart is due within 30 days. In this scenario, for Sony, accounts receivable would be debited for $10,000, and retained earnings would be credited for $10,000, making the balance sheet balance. The reason retained earnings would be credited is that the sale of $10,000 would be a revenue for Sony, and therefore would increase retained earnings.
Key Summary Recap
- Definition: Accounts receivable (AR) is money owed to you by customers for products you have already delivered but not yet been paid for.
- Balance Sheet location: Accounts receivables are listed on the assets section of the balance sheet under current assets.
- Accounts Receivable Debit or Credit?: An increase in accounts receivable is a debit.
Additional Resources
Want to level up your accounting? Consider checking out our Financial Accounting Essentials where we teach students how to build a balance sheet, income statement, and cash flow statement from scratch based on a set of transactions. You'll also learn to find, read, and analyze the financial statements of real companies such as Microsoft and PepsiCo. Students who have taken this course have gone on to work at Barclays, Bloomberg, Goldman Sachs, EY, and many other prestigious companies. Get started now!
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