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Simply stated, accounts receivable is what customers still owe a business. More technically put, accounts receivable is the sum of outstanding balances owed to a business by third parties for goods delivered or services rendered, purchased on credit with terms of one year or less. Accounts receivable, often abbreviated “A/R,” or referred to as “trade receivable” or simply, “receivables,” is therefore considered a short-term asset on businesses’ balance sheets.
Businesses extend short-term, interest-free credit to customers to attract more sales. However, extending too much credit or extending it to parties unable to pay can hurt a business. Companies can measure and monitor their efficiency in collecting receivables by two chief measures: the accounting receivable ratio and accounts receivable days.
The accounting receivable ratio, also called the accounting receivable turnover ratio, tells you how many times over a given period a business collects its receivables. The higher the number, the more efficient a company is at collecting receivables. However, a very high number may indicate an overly onerous credit policy that potentially drives away sales. Inversely, a very low number indicates an overly lax credit policy or ineffective collections method. The ratio is expressed as follows:
Accounts Receivable Turnover Ratio = Net Credit Sales/Average Accounts Receivable
Accounts receivable days, also called days sales outstanding (DSO), is the average number of days it takes a business to collect payment on its credit sales.
It is expressed as follows:
Accounts Receivable Days = (Accounts Receivable/Total Credit Sales) x Number of Days in Cycle
As an accounts receivable specialist, your first responsibility is to respond to basic client inquiries and other clerical tasks related to maintaining the accounts receivable records for your organization. You may also:
Depending on the job you want, you may need:
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Depending on the path, accounts receivables can become:
What is the difference between accounts receivable and accounts payable? You can think of A/R and A/P, and the job responsibilities involved with each, as mirror images of the other. Accounts receivable is a collection of current assets a company has a right to collect; accounts payable is a collection of current liabilities a company is required to pay. A/R professionals handle the billing of customers and the monitoring and collection of those bills in a timely fashion. The job is more externally focused. A/P professionals handle the verification of and payment of bills the company owes to third parties in a timely fashion. The job is more internally focused. But both accounts receivable and accounts payable must work together to ensure the company has collected sufficient funds from its customers in order to meet its own obligations on a continual basis.
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