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What is Accounts Receivable?

Accounts Receivable (AR) refers to the outstanding payments that a company is yet to receive from its customers for goods or services provided on credit. In other words, it represents the money owed to a business by its clients or customers.

Why is it important or used in Accounting?

Accounts Receivable is a crucial component of a company’s financial health and is used in accounting for several reasons:

Advantages of Accounts Receivable:

Disadvantages of Accounts Receivable:

Example of Accounts Receivable for a Wholesaler or Retailer Business:

Consider a wholesale distributor of electronics that supplies goods to various retailers on credit terms. An account receivable is created when the distributor delivers a batch of smartphones to a retailer. The retailer agrees to pay the distributor within 30 days.

This amount becomes an accounts receivable in the distributor’s books until the payment is received. This allows the distributor to recognize sales revenue immediately while managing the timing of cash inflows. The distributor will then track and manage these receivables to ensure timely collection, maintain a healthy cash flow, and sustain business operations.