Accounts Receivable: Everything You Need to Know

It's critically important to understand accounts receivable, an essential aspect of your business's finances and payment terms. Accounts receivable are legally enforceable claims for payment held by a company for goods supplied or services rendered that customers or clients have ordered but haven't yet been paid for. Typically, the average accounts receivable records the amount due by customers or entities.

Key Takeaways: 

• Understand the difference between accounts payable and receivable.

• Learn where to find accounts receivable and if it's considered revenue. 

• Consider the strategic interpretation of accounts receivable for forecasting and late payments.

• Weigh other types of receivables, including notes receivable. 

What is Accounts Receivable?

Accounts receivable are goods, money, or services owed to a business. The accounts receivable process doesn't happen immediately. Instead, a small business will receive the goods or services after the transaction occurs. You'll find accounts receivable in the assets section of a balance sheet because it represents future cash inflows. 

Accounts receivable is considered part of a company’s working capital, with payments expected to be made in short-term periods. The total amount of accounts receivable your business anticipates collecting after factoring in uncollectible receivables and discounts is called a net receivable. 

What is the Difference Between Accounts Receivable and Accounts Payable?

Accounts payable and accounts receivable have several differences.

Accounts payable is:

• A liability.

• Considered cash outflows and credit card purchases.

• Money received by a company in the future for goods or services from suppliers on credit.

• Relevant to bills payable and collectors.

Accounts payable example: If your business purchases $1,000 worth of office supplies with a payment due in 30 days, it should be recorded as accounts payable. You would do this because it's the amount of money your business owes that has yet to be paid.

Accounts receivable is:  

• An asset. 

• Considered cash inflows and credit sales.

• Money received by a company in the future for goods or services rendered to customers on credit.

• Relevant to bills receivable and debtors.

Accounts receivable example: If your business provides $1,000 in services to a client who agrees to pay you in 30 days, it should be recorded as accounts receivable. You would do this because it's money to your business for services you've delivered but have not yet been compensated for. 

Strategically Interpreting Accounts Receivable

Helpful information can be gleaned from your business's accounts receivable. If you're exploring a potential sale of your business, accounts receivable can determine value by analyzing: 

• Your company’s balance sheet impact.

• Cash flow (Accounts receivable is a component of your business's overall cash flow projections.).

• Revenue and profitability.

• Quality of receivables.

Accounts receivable turnover ratio and days sales outstanding (DSO) ratio are used to evaluate the efficiency with which your business collects outstanding customer payments. It's important that your business has a lower DSO or turnover ratio, a key indicator of a positive collection process, cash flow management, and liquidity. 

Maximize the strategic impact of your accounts receivable with 1-800Accountant's year-round tax advisory solution. 

Is Accounts Receivable Revenue?

Your accounts receivable balance is revenue, depending on how you construct your balance sheet.

If you use cash basis accounting, you shouldn’t include accounts receivable in the accrued revenue calculations of your general ledger. Cash basis accounting uses the cash itself to determine when a transaction is recorded.

However, if you use accrual basis accounting, you can include payments as revenue after transactions involving goods or services are complete. You'll record accounts receivable as revenue on your balance sheet for accrual basis accounting. Accrual basis accounting uses the actual act of exchanging a product or a service to determine when a transaction is recorded.

Learn more about these two essential accounting methods in our blog, Cash Basis Accounting vs. Accrual Basis Accounting – What’s the Difference?

Where Can I Find Accounts Receivable?

You can find your accounts receivable on your balance sheet. You'll list it as a current asset on the balance sheet or a long-term asset, depending on when the transaction occurred. This is a manual process that you can automate with accounting software.

What Are the Other Types of Receivables?

There are at least four types of receivables most business owners use to help with outstanding invoices, collect payments, and streamline operations. They are:

• Interest receivable.

• Nontrade receivable.

• Notes receivable.

• Trade receivable.

Notes receivable

Notes receivable, like accounts receivable, is an amount owed to your business. However, customers will sign a promissory note to provide proof of their debts, hence the name. As a business owner, you can use a promissory note for legal purposes if the debt remains unpaid for a period of time. 

Notes receivable can either be a current asset or a long-term asset. 

• If notes receivable are due within a year or less, they are considered a current asset. 

• If notes receivable are due in more than one year, they are considered a long-term asset.

Other receivables

Other receivables can be helpful for your bookkeeping needs: 

• Interest receivable.  

• Nontrade receivable.

• Trade receivable.

Interest receivable is the amount of interest owed to a company. Like notes receivable, interest receivable is an asset on a balance sheet.

Interest receivable payments aren't payments that a company has received. However, they have a later due date. Recording interest receivable on your financial statements can help you determine the amount of interest owed to you.

Trade receivables refer to amounts owed for goods and services, encompassing both accounts receivable and notes receivable. Nontrade receivables are amounts outside of business transactions that comprise: 

• Advances to employees.

• Claims for losses or damages.

• Dividends.

• Interest receivable.

What If Receivables Are Not Paid?

While proactive collection policies are helpful, such as the implementation of late fees, there may be times when receivables go past due and remain unpaid, which can significantly impact your business and its cash flow, as well as other critical metrics. When a debt is deemed uncollectible, it is recognized as a bad debt expense for financial reporting purposes.

Businesses will offer accounts receivable discounts, which can be in the form of favorable credit terms if paid within a shorter timeframe, incentivizing early payment options. These discounts are used to improve business cash flow while minimizing the risk of unpaid invoices and bad debt. 

Work with the Pros

Recording accounts receivable is a crucial aspect of small business bookkeeping. This task, and bookkeeping more generally, can be tedious and time-consuming, diverting your attention away from critical pro-growth projects. When this happens, it's time to consider professional support from the experts at 1-800Accountant, America's leading virtual accounting firm. 

Working with expert bookkeepers, such as those who power 1-800Accountant's full-service bookkeeping solution, can seamlessly address bookkeeping tasks, including accounts receivable, ensuring compliance and peace of mind with error-free work. 1-800Accountant’s CPAs and tax professionals routinely advise businesses, via year-round tax advisory services, to help them make strategic business decisions.

Don't wait - speak with 1-800Accountant today. Schedule a quick consultation – typically 30 minutes or less— to learn more and get started.