Accounts Receivable

What is Accounts Receivable?


Accounts Receivable is the money that is owed by a customer for goods & services rendered, but not yet paid for.  Receivables are short term in nature and are usually due within a few days to 1 year.  For this reason, they are included on the balance sheet as a short term asset.  Whether or not a customer receives a credit line will depend on a factors such as industry and the customer's credit worthiness. 

The repayment terms vary by customer and purchase volume; however, it is common for accounts receivables to be Net 30 which suggests that the customer will owe payment within 30 days of making their puchase or receiving a service.  Your mortgage payment is an example of an accounts receivable.  Your mortagage company provides you with the use of funds and charges you interest for that, on a monthly basis.  In turn, you will owe a principal plus interest payment to them each month, assuming you hold a fully amortizing loan.

A company must be careful in assessing their customer and the credit line that they approve them for or they could run into high levels of default.  The mortgage crisis we are currently in is a prime example of what can happen if a customer is not evaluated correctly and given the appropriate lines of credit.   Companies' create accounts with allowances for bad debt on their balance sheets to anticipate these circumstances.  Additionally, they will sell these debts to collection agencies for pennies on the dollar.  The collection agencies will then move forward on retrieving the full value of the debt on their own.
Tim Ord
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