Word of the Week 'Accounts Receivable'

Accounts receivable

Accounts receivable refers to short-term amounts due from buyers to a seller who have purchased goods or services from the seller on credit. Credit is usually granted in order to gain sales or to respond to the granting of credit by competitors. Accounts receivable is listed as a current asset on the seller's balance sheet.

The total amount of accounts receivable allowed to an individual customer is typically limited by a credit limit, which is set by the seller's credit department, based on the finances of the buyer and its past payment history with the seller. Credit limits may be reduced during difficult financial conditions when the seller cannot afford to incur excessive bad debt losses.

Accounts receivable are commonly paired with the allowance for doubtful accounts (a contra account), in which is stored a reserve for bad debts. The combined balances in the accounts receivable and allowance accounts represent the net carrying value of accounts receivable.

The seller may use its accounts receivable as collateral for a loan, or sell them off to a factor in exchange for immediate cash.

Accounts receivable may be further subdivided into trade receivables and non trade receivables, where trade receivables are from a company's normal business partners, and non trade receivables are all other receivables, such as amounts due from employees