Accounts receivable is an important item on accounting reports, particularly on a company's balance sheet and often in the notes to financial statements. Accounts receivable (AR) represents the amounts owed to a company by its customers for goods or services that have been delivered but not yet paid for.
How does an accounts receivable process work?
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1. Click "Accounting Reports" dropdown then select "Accounts Receivable"
2. Filter report by "Location" and "Date Period"
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Recording (and collecting on) accounts receivable follows a simple process:
A customer requests to purchase goods or services via a signed contract or purchase order.
Goods or services are delivered.
The merchant provides the customer with an invoice and notes the amount of money due as a credit in accounts receivable.
The customer pays the balance and the merchant debits that amount from accounts receivable and records it as a deposit.
You’d accept the order, make and ship the tiles, and invoice the customer for $450, plus tax and shipping, as applicable. The total amount your customer owes would then be recorded as a credit on your balance sheet under accounts receivable.
Once this sum is paid, the total would be deducted from accounts receivable and recorded as a deposit under revenue.
Balance Sheet: Accounts receivable is listed as a current asset on the balance sheet, typically under the "Current Assets" section. It reflects the total amount of money that the company expects to collect from its customers within a year.
Example:
diffCopy codeCurrent Assets - Cash - Accounts Receivable: $X,XXX,XXX - Inventory - Prepaid Expenses
Aging Schedule: In many financial statements, especially for larger companies, you might see an aging schedule as a part of the accounts receivable note. This schedule categorizes accounts receivable based on the number of days outstanding (e.g., 30 days, 60 days, 90 days, etc.), which provides insights into the company's collection efficiency and potential credit risk.
Notes to Financial Statements: In the notes accompanying the financial statements, a company often provides additional information about accounts receivable. This can include the company's credit policies, bad debt provisions, and other relevant information.
Income Statement: Accounts receivable itself is not usually reported on the income statement. However, changes in accounts receivable can indirectly affect the income statement. An increase in AR means that sales have been made but not yet collected, which can impact revenue and potentially trigger the need for provisions for bad debts.
Cash Flow Statement: Changes in accounts receivable are also reflected in the cash flow statement. An increase in AR means less cash has been collected from customers, and this is captured in the operating activities section of the cash flow statement.
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The accounts receivable balance and its changes over time are important for various stakeholders, including investors, creditors, and management, as they provide insights into a company's liquidity, credit policies, and potential risks associated with collecting outstanding amounts.
In summary, accounts receivable is a crucial item on accounting reports, and its proper management and reporting are essential for understanding a company's financial health and its ability to collect outstanding debts.