Accounts Receivable, What Is It?

by JR Rooney

Accounts receivable is the first step in a series of collection attempts dealing with the billing of customers who owe money to a consumer, business or an organization for products and/or services that have been provided to the customer. This is sometimes done in a small organization by writing an invoice and sending via mail, fax or email.

On a business balance sheet, accounts receivable is the amount that customers owe the business. Aka AR, they are classified as current assets. To record a journal entry for a sale on account, 1 must debit a receivable and credit a revenue account. When the customer pays off the account, 1 debits cash and credit the receivable in the journal entry. The ending balance on the trial balance sheet for accounts receivable is always debit.

Business organizations which have become too large to perform such tasks by hand (or small ones that could but prefer not to do them by hand) will generally use accounting software on a computer to perform this task.

Associated accounting issues include recognizing accounts receivable, valuing accounts receivable, and disposing of accounts receivable.

There are many types of accounting transactions like accounts payable (AP), payroll and trial balance.

Since not all customer debts will be collected by the AR department, companies typically record an allowance for bad debts which is subtracted from total accounts receivable. When accounts receivable are not paid, some companies turn them over to collection agencies. However, many debtors just won’t pay the AR; in those cases, smart creditors turn to a collection agency.

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