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Accounts Receivable

Accounts receivable (AR) refers to the amounts owed to a business by customers for goods or services delivered but not yet paid for, classified as a current asset on the balance sheet. Effective management of AR is crucial for maintaining liquidity and cash flow, involving monitoring outstanding debts and assessing customer creditworthiness. The AR turnover ratio serves as a key metric for evaluating a company's credit policies and financial health.

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18 views1 page

Accounts Receivable

Accounts receivable (AR) refers to the amounts owed to a business by customers for goods or services delivered but not yet paid for, classified as a current asset on the balance sheet. Effective management of AR is crucial for maintaining liquidity and cash flow, involving monitoring outstanding debts and assessing customer creditworthiness. The AR turnover ratio serves as a key metric for evaluating a company's credit policies and financial health.

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acupiadomev
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Accounts Receivable:

Accounts receivable (AR) represents the amounts owed to a business by its customers for goods or
services that have been delivered but not yet paid for. This type of asset arises from credit sales, where
a company allows its customers to pay for products or services after a certain period. The amounts due
can vary depending on the payment terms agreed upon between the business and the customer. AR is
classified as a current asset on the balance sheet, assuming the amount is expected to be collected
within one year. A well-managed accounts receivable system ensures that a company can convert these
outstanding debts into cash, supporting ongoing operations and growth.

Managing accounts receivable is essential for maintaining a company’s liquidity and cash flow.
Businesses typically set specific terms for repayment, such as "Net 30" or "Net 60," which means the
payment is due 30 or 60 days after the invoice date. Efficient AR management involves monitoring
outstanding receivables, following up on overdue accounts, and sometimes offering discounts or
incentives for early payments. Companies may also assess the creditworthiness of their customers to
reduce the risk of bad debts, ensuring that the receivables are collectible. Failure to manage AR
effectively can lead to cash flow problems, as funds tied up in unpaid invoices can prevent a business
from covering its own short-term liabilities.

In addition to cash flow management, accounts receivable is a key metric for assessing a company’s
credit policies and overall financial health. A high level of AR may indicate a company is extending too
much credit, which can lead to increased risk and delayed payments. Conversely, a low AR balance could
suggest that the company’s customers are paying quickly, but it might also mean the company is not
maximizing sales by offering favorable credit terms. AR turnover ratio, which measures how efficiently a
company collects its receivables, is a crucial indicator for investors and analysts to evaluate the
effectiveness of a business’s credit management strategies.

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