Account receivables is the amount that is left to be paid by the customer in return for the goods and services that the company gave them. In other words, Account receivable is the amount due paid by the customers or clients. It is recorded under the current asset in the balance sheet.
Suppose you are a grocery store and a person buys 14 items of groceries from your store but he didn’t pay so that due amount will be treated as account receivable and recorded in the balance sheet on the side of the current asset. This is recorded here so that the company accountant knows that this amount is also left and is to be received. When the account receivable is received, then we can measure the inventory turnover ratio and analyze profit easily. Without account receivable, we can’t match the balance of current assets and current liabilities in the balance sheet.
Many people are confused between account receivable and account payables, so let me tell you about this.
Account receivables is the amount paid by the customers to the company for goods or services. It is recorded on the side of current assets under the balance sheet.
Account payables is the amount paid to the vendors or manufacturer for goods or services. It is recorded on the side of current payables under the balance sheet.
Without AR and AP, companies cannot prepare a balance sheet at the end of the financial year unless the current assets and current liabilities show an equal amount. Both are totally opposite attractions and opposite impacts on the balance sheet.
Every company sells its products to the customers and then charges the entire amount for a short time, so after performing this process, the account receivable is created in the balance so that this amount is yet to be received. Company has full right to receive that whole amount after a fixed period. We all know account receivable is considered as an asset which is recorded for the legal obligations for the customer to pay the debt.
Account receivables is the most important part for business activities and recording, A we know, it is a current asset which helps to measure the liquidity of the company and capability to cover short term obligations. The term ‘account receivables turnover ratio’ is the ratio that shows how many times a company has received an amount on its account receivables during the accounting period. It is calculated as,
Account receivables turnover ratio (ARTR) = Net sales/ average account receivables, the net sales is divided by average account receivables or net sales = sales – sales return.
The company must make pay a bill at the time of selling it so that it can record the current assets in the form of account receivables under balance sheet, on the other side, the customer must receive a bill for reminder,so that the accountant knows that these are unpaid invoices.
Many companies use accounting software to do and record accounting such as account receivables, account payables, track invoices, payroll, remind the customer and vendors for unpaid invoices and so many things.