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Accounts Receivable

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Accounts receivable are obligations due to the company from customers. Suppose a company sells a customer $50 in merchandise. The sales account increases by $50 and accounts receivable increases by $50. When the customer pays, cash increases $50 and accounts receivable decreases $50, reducing the accounts receivable for this obligation to $0. Since the company continually makes new sales, however, accounts receivable ordinarily has a positive balance. Accounts receivable are normally due within 90 days or less and are highly liquid. Indeed, in certain industries, accounts receivable are regularly sold or "factored" to receive immediate cash. Accounts receivable are therefore listed on the balance sheet as a current asset, below (completely liquid) cash and above (relatively less liquid) inventory. Accountants assume that the longer an account receivable is outstanding, the less likely it will be paid. Thus accounts receivable are regularly "aged" and written down to reflect the likely portion of accounts receivable that are uncollectible. Rising accounts receivable could mean customers are paying more slowly, but it can also indicate higher sales.



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