Businesses using AR should keep track of their turnover ratio and proactively communicate with customers to ensure prompt payments.
FREMONT, CA: An account receivable balance represents the outstanding balance owed by a business to its customers for goods or services delivered but not paid. Corporate management's credit policies and the sector in which a firm operates affect the balance of its accounts receivables. Companies track their accounts receivable on a balance sheet, which includes information such as how much money they expect to receive as assets and how much money they expect to pay out as liabilities. Finding out a company's overall health depends on understanding its receivables.
Payment terms: Customers who are sold products on credit will be charged a late fee if they don't pay their bills within a specified period. A company that sells products on credit sets terms for its accounts receivable, which include how many days they must pay before they are charged. The seller can approach its customer if the buyer refuses to pay the bill under the terms and offer new terms or some other remedy.
The firm may either hire a collection agency or sue the person or institution owing it money and hope to seize assets if no progress is made.
Large AR amounts can be risky: Having many outstanding accounts receivable on your balance sheet might seem appealing. If a company goes bankrupt or fails to pay, AR can expose the company to a degree of risk. Walmart would likely go bankrupt or not pay, requiring the seller to write USD 1.5 million off its accounts receivable balance.
When considering a company's growth prospects, check out its accounts receivable book, which should be well diversified. Taking on this loss and being left with 50,000 units of custom books could be a disaster for the seller.
An alternative to AR: Those companies that insist on being paid upfront don't record an AR transaction on their balance sheet but instead enter a liability called unearned revenue or prepaid revenue on the balance sheet. Unearned revenue is transferred from the balance sheet to the income statement, either through delivering promised products, using a percentage of completion method, or simply by time passing. Sales increase as a result of the reduction of liability.
