Definition of Accounts Receivable
Accounts receivable is a current asset that results when a company reports revenues from sales of products or the providing of services on credit using the accrual basis of accounting. The effect on the company's balance sheet is an increase in current assets and an increase in owner's or stockholders' equity. The company's income statement will also report the amount of the revenues earned.
Example of an Account Receivable
Assume that Heating Repair Service (HRS) provides services for a customer on December 28 and allows the customer 10 days in which to pay its invoice of $850. On December 28, HRS records the $850 it has earned in the current asset account Accounts Receivable and in the revenue account Service Revenues. On HRS's income statement for the period that includes December 28, the $850 of revenues minus the related expenses results in the amount of net income.
Effect from Collecting an Account Receivable
Assume that on January 8, HRS receives the $850 from the customer whose furnace was repaired on December 28. The effect of HRS receiving the $850 is to increase the current asset Cash and to decrease the current asset Accounts Receivable. Note that no revenue is reported when the $850 is received on January 8 and there is no effect on HRS's net income.
Remember there is a difference between receipts and revenues:
- Cash receipts from collecting accounts receivable or from obtaining a bank loan are not revenues
- Revenues are amounts that companies earned by selling products or providing services. When the cash is received (at the time of the sale or service or at a later date) is not the determining factor of when the revenues and the account receivable are earned under the accrual basis or method of accounting.