Accounts Receivable
In this article, Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022) elaborates on the concept of accounts receivable.
This read will help you get started with understanding accounts receivable and its significance.
Introduction
Accounts Receivable appears in the balance sheet of a company when an entity (an individual or a company) purchases goods or services on credit from the company and the payment will be received later.
It is the amount of money owed by the customer for any purchase that is made on credit. Quite often, business sells products/services to its customers but the payment is made in the future and issues an invoice for this same in the meantime. This invoice signifies that the product has been sent but the payment is to be done within a specified future date. These are a form of short-term debt since they are to be paid back in a short span. The time for the payment is usually from about 30 days to a few months.
Example
Company A that sells broadband service usually provides the service for the month, but the payment is typically received at the end of the month. This means that even though the service has been provided, the payment is pending hence making it an accounts receivable.
Mostly, businesses provide credit purchases to customers with whom they have frequent transactions. This enables them to avoid the hassle of payments every time a transaction occurs. It also helps build a good relationship with its clients by providing them an ease of payment.
Accounting Treatment
As discussed, since Accounts Receivables is like a short-term credit line to clients hence it is treated as a short-term asset in the balance sheet. It falls under ‘Current Assets’ since the payment is received in the short term. For double entry, the credit side of the same is recorded in the income account as a sale. Once, the payment is made the cash in the balance sheet will increase and the accounts receivable will decrease. For goods like raw materials, there is a variation in inventory in the revenues and a decrease in the Asset side under ‘Inventory’.
The increase or decrease in accounts receivable from the prior period is also recorded in the Cash Flow Statement.
Final Words
Accounts receivable are crucial to every economy and it differs based on various factors and is taken in control by policy makers whenever needed. As a student curious about Finance, learning about accounts receivable will go a long way in the future to understand better how liquidity and prices in the economy is maintained.
Relevance to the SimTrade certificate
This post deals with Accounts Receivable and its significance on the book of accounts of a company.
About theory
- By taking the SimTrade course , you will learn more about the markets. It’s important to remember that accounts receivables are an important to assess it to understand the financial health of a company you would like to invest in.
About practice
- By launching the series of Market maker simulations, you can extend your learning about financial markets and trading approaches.
Related posts on the SimTrade blog
▶ Shruti CHAND Balance sheet
▶ Shruti CHAND Accounts Payable
▶ Shruti CHAND Current Assets
About the author
Article written in October 2021 by Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022).