What Is an Example of Accounts Receivable?

Accounts receivable represents the money owed to a business by its customers for goods or services delivered but not yet paid for. It functions as a current asset on a company’s balance sheet, reflecting a short-term claim that is expected to be converted into cash within a typical operating cycle, usually a year or less. This financial arrangement allows businesses to extend credit to their clients, facilitating transactions that might not occur if immediate payment were always required.

What Accounts Receivable Represents

Accounts receivable originates when a business provides products or services on credit terms. This means the customer receives the benefit immediately but agrees to pay the business at a specified later date. The creation of an accounts receivable signifies a promise of future payment, which is a common practice in many commercial dealings.

These amounts are short-term assets, generally collected within 30 to 90 days. An invoice serves as the formal document detailing the goods or services provided, the amount due, and the payment terms. It acts as the official request for payment and the record of the outstanding debt.

Businesses rely on the timely collection of accounts receivable to maintain healthy cash flow and fund ongoing operations. The ability to offer credit can enhance customer relationships and expand a company’s market reach. However, it also requires diligent management to ensure these outstanding amounts are collected efficiently.

Illustrative Scenarios

A wholesale distributor selling electronics to a retail store on credit terms creates an accounts receivable for the value of the inventory shipped. The retail store receives the products and agrees to pay the distributor within the agreed-upon period, such as 45 days from the invoice date.

A consulting firm that completes a project for a client issues an invoice for its professional services after the work is delivered. The amount the client owes to the consulting firm for the completed project constitutes an accounts receivable until the payment is processed.

A construction company bills clients for completed phases of a large building project. After finishing the foundation work, the company will invoice the client for that specific phase, creating an accounts receivable. The client then has a set period to remit payment for the completed portion of the work.

Utility companies, such as electricity or water providers, generate accounts receivable when they deliver services throughout a billing cycle before sending out monthly statements. Customers consume the utility, and the charge for that consumption becomes an accounts receivable for the utility company once the bill is issued.

The Accounts Receivable Lifecycle

The lifecycle of an accounts receivable begins with the initial credit sale and extends until the payment is successfully collected. After a business delivers goods or services, an invoice is generated and sent to the customer. This invoice specifies the amount due, a unique invoice number, a description of items or services, and payment terms.

Payment terms define the agreed-upon period for payment, such as “Net 30,” meaning the full amount is due within 30 days of the invoice date. Businesses then track these invoices, monitoring their due dates and outstanding balances. This tracking is crucial for managing cash flow and identifying any overdue accounts.

As the due date approaches or passes, businesses may send reminders to customers to ensure timely payment. Upon receiving payment, the accounts receivable balance is reduced or eliminated, and the transaction is recorded as collected cash. This completes the cycle, converting the outstanding debt into liquid funds.