Accounts receivable is the amount owed to a seller by a customer. As such, it is an asset, since it is convertible to cash on a future date. It is not a form of revenue, since it was created as the result of a revenue-generating event - that is, a sale transaction occurred on credit at some point in the past, which resulted in the creation of the accounts receivable asset.

The balance in the accounts receivable account is comprised of all unpaid receivables. This typically means that the account balance includes unpaid invoice balances from both the current and prior periods. Conversely, the amount of revenue reported in the income statement is only for the current reporting period. This means that the accounts receivable balance tends to be larger than the amount of reported revenue in any reporting period, especially if payment terms are for a longer period than the duration of the reporting period.

In a situation where a company does not allow any credit to customers - that is, all sales are paid for up front in cash - there are no accounts receivable.

Presentation of Accounts Receivable

Accounts receivable is listed as a current asset on the balance sheet, since it is usually convertible into cash in less than one year. In the rare cases in which an account receivable is not to be collected within the next year, it is instead presented as a long-term asset. If your business is using the accrual basis of accounting, then the accounts receivable line item is usually paired with and offset by an allowance for doubtful accounts. This allowance contains an estimate of the total amount of bad debts related to the receivable asset. The net reported amount of the gross receivable and the allowance is the amount of receivables outstanding that management actually expects to collect.

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Anyone analyzing the results of a business should compare the ending accounts receivable balance to revenue, and plot this ratio on a trend line. If the ratio is declining over time, it means that the company is having increasing difficulty collecting cash from its customers, which could lead to financial problems. This situation may arise when a business increases the amount of credit it is offering to riskier customers, or when it spends less money on collections staff.

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