Accounts Receivable (AR) Definition
Accounts receivable refers to the balance of money owed to a firm for goods or services that the company allowed its customers to purchase on credit. These are the outstanding invoices that a company possesses. In the balance sheet of a company, these accounts are presented as a credit balance. They result from the daily economic activities carried out by the company. Company managers strive to ensure high Accounts Receivables Turnover.
A Little More on What is Accounts Receivable
Depending on the period of time arranged to settle the right to collect, these may be classified as short-term receivables (less than 12 months) or long-term receivables (more than 12 months). Long-term receivables must be reclassified at the end of the economic period as short-term accounts receivable if the loan matures in the next 12 months.
The accounts receivable, which is a credit granted by the company to its clients, contributes to financing the economic activities of the company. This is because accounts receivable represent an amount of money pending to be charged for the sale of goods and services. In the books of the company that receives the credit, this sum of money is recorded under accounts payable.
The accounts receivables are classified into two; Short-term receivables which take less than 12 months to mature and long-term receivables which take more than 12 months to mature. However, after the end of every economic period, long-term receivables are reclassified as short-term receivables if they are expected to mature in the next 12 months.
Example of Posting to Accounts Receivable Turnover
Let’s assume that a company X sells goods with a worth of $20,000 to another company Y. This sale is free of VAT, and the company X issues an invoice that is payable in 90 days.
First of all, an entry is made in the merchandise sale’s account for $20,000. Since the credit will be settled in 90 days through an economic effect, another entry is created which will ensure the company’s account will be canceled against the customers’ account.
Through this method, company X finances the purchase of merchandise and gets a commercial credit for 90 days granted to company Y.
References for Accounts Receivable
Academic Research on Accounts Receivable
- Performance matched discretionary accrual measures, Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005), Journal of accounting and economics, 39(1), 163-197. This paper investigates the power of tests based on discretionary accruals which are performance marched. It then compares this with tests based on traditional discretionary accrual measures.
- Economic aspects of inventory and receivables financing, Koch, A. R. (1948), Law & Contemp. Probs., 13, 566. This article centers itself on the financing of business assets, and particularly the part that financial institutions play together with other sources of funds.
- Fundamental information analysis, Lev, B., & Thiagarajan, S. R. (1993), Journal of Accounting research, 190-215. The paper is set on finding out the value of corporate securities through careful examination of the key-value drivers which include risk, growth, earnings and competitive position.
- Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable, Bougheas, S., Mateut, S., & Mizen, P. (2009), Journal of Banking & Finance, 33(2), 300-307. The article develops a model by considering the trade-offs with inventories. This model attempts to recognize the incentives faced by a firm to offer and receive credit.
- Relationship between working capital management and profitability of listed companies in the Athens stock exchange, Lazaridis, I., & Tryfonidis, D. (2006). The study investigates the existing relationship between corporate profitability and working capital management, by using a sample of 131 companies that were listed in the Athens Stock Exchange from 2001 to 2004.
- Liquidity‐profitability tradeoff: An empirical investigation in an emerging market, Eljelly, A. M. (2004), International journal of commerce and management, 14(2), 48-61. This article examines the relationship between profitability and liquidity measured by a cash gap and current ratio.
- Mismanagement of accounts receivable by small businesses, Grablowsky, B. J. (1976), Journal of Small Business Management (pre-1986), 14(000004), 23. This paper examines the various ways through which small businesses mismanage their accounts receivable and what they can change to control this mismanagement.
- Accounting needs of very small business, DeThomas, A. R., & Fredenberger, W. B. (1985), The CPA Journal (pre-1986), 55(000010), 14. Since small businesses have varying accounting requirements with big firms, this paper aims at examining these requirements and expounding on them.
- The market pricing of accruals quality, Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). Journal of accounting and economics, 39(2), 295-327. This study investigates whether the investors price the accruals quality (AQ) based on the proxy for the information risk that is associated with earnings.
- Forecasting company failure in the UK using discriminant analysis and financial ratio data, Taffler, R. J. (1982), Journal of the Royal Statistical Society. Series A (General), 342-358. In this paper, a discriminant model is described whose sole purpose is to identify the British companies which face a risk of failure. The paper then discusses the results of this application since its development and the degree of intertemporal validity it has.
- Opportunity cost in the evaluation of investment in accounts receivable, Oh, J. S. (1976), Financial Management, 32-36. This paper examines the frequently used method of evaluating the investment in accounts receivable. The method is shown to understate the opportunity cost and the number of resources applied.