Accounts Receivable

What are Accounts Receivable (AR)?

Accounts receivable are the amounts due from customers in respect of sales made to them on credit net of expected returns. Of course, when credit is extended to a customer it means the business takes on credit risk and accepts the possibility that the customer may default. If this becomes clear then the receivable must be written down to the estimated recoverable amount. The amount of the write-down is called a bad debt and it will also be recorded in the income statement as an expense of doing business (usually as part of SG&A).

Understanding Accounts Receivable (AR)

Accounts receivable (AR) are classified as current assets on the balance sheet because they are expected to be converted into cash within a year. Accounts receivable are crucial for maintaining cash flow and liquidity in a business. If a company sells products on credit, the amount due from the customer is recorded as accounts receivable.

Credit risk always involves some losses and an estimate of future bad debts is made based on past experience and history. Accounts receivable is stated “net” of this estimate called the doubtful debts allowance. As with all estimates, this is reviewed and updated on a regular basis. Often the footnotes provide more detailed information on the process amounts. Accounts receivable are part of the operating current assets, which are used to calculate operating working capital (OWC).

Example of Accounts Receivable

This is illustrated by the example below of Apple’s 2Q25 accounts receivable:

Apple Inc. Condensed Consolidated Balance Sheets (Unaudited)

Source: Felix

The accounts receivable are shown in the current assets on the balance sheet as $26.1m for March 29th 2025 and $33.4m for September 28th 2024. There is a further note accompanying the balance sheet with more detail:

The notes split receivables into two components – trade receivables and vendor non-trade receivables which reflects the nature of Apple Inc’s businesses. This additional information can assist investors and analysts in determining how well-managed receivables are. Typically, this is down by measuring it (usually in working capital days) or as a percentage YoY.

Accounts Receivable as a Current Asset

Accounts receivable can appear as current or non-current assets. It is unusual to give credit to a customer for more than a year and hence the most common categorization is under the current asset designation.

Accounts Receivable vs. Accounts Payable

Accounts receivable represent money owed to the company by its customers, while accounts payable represent money the company owes to its suppliers.

Essentially, accounts receivable are assets, and accounts payable are liabilities.

What Accounts Receivable Can Tell You

Accounts receivable can provide insights into a company’s sales and credit policies. High accounts receivable may indicate strong sales, but it could also suggest that the company is extending credit to customers who may not be able to pay. Analysts will need to look closer at the figures reported by the company as well as analyze the customer demographics when looking at company performance.

When Does a Debt Become a Receivable?

A debt becomes a receivable when a sale is made on credit. This means the customer has received the goods or services but has not yet paid for them.

Where Do I Find a Company’s Accounts Receivable?

Accounts receivable can appear as current or non-current assets on a company’s balance sheet. It is unusual to give credit to a customer for more than a year, so the most common categorization is under the current asset designation.

Accounts Receivable as Part of Working Capital

Accounts receivable is part of a company’s working capital. Working capital gauges the short-term financial health of a company and can indicate if a company has enough cash to cover its short-term operating obligations. Other assets in WC include cash, cash-like securities, inventory and prepaid expenses. These are netted off against the company’s current liabilities, such as accounts payable, short-term debt and other short-term liabilities to see whether a company needs additional cash to support the running of the business or not.

If a company has a positive working capital it means its current assets exceed its current liabilities and it has enough cash to cover its needs. If the opposite is true and current liabilities exceed current assets, then the company will need additional cash to support the day-to-day operations at the company. Accounts receivable (the credit owed by customers) can form a vital part of this calculation.

Accounts receivable is also part of operating working capital calculations, which use a narrower definition of just operating current assets and liabilities to gauge the liquidity and financial health of a company.

Accounts Receivable Days

One metric used to assess accounts receivable is to look at it in terms of days, and as part of working capital days. The formula for this calculation takes accounts receivable divided by cost of goods sold multiplied by the number of days in the period (usually annually so 365).

Accounts Receivable / Cost of Goods Sold (COGS) x 365 days

If a company had accounts receivable of $450 and COGS of $1,500 for a 12-month period, we can calculate the receivable days as 450 divided by 1500, multiplied by 365 to equal 109.5 days. This tells us that on average the company’s customers will take 109.5 days to pay off their credit.

Receivable days can be a good indicator to show if a company is able to get its customers to pay quickly and run its operations efficiently. When added to inventory days (the average days inventory is held by a company) and payable days (the average days it takes the company to pay its suppliers etc.) analysts can examine the business’s working capital cycle.

Access the free Financial Edge template to calculate operating working capital as well as receivable days.

Conclusion

Accounts receivable play a crucial role in maintaining a company’s cash flow and liquidity. By understanding the nuances of accounts receivable, businesses can better manage their credit risk and ensure that they have the necessary funds to operate smoothly.

The allowances for estimated customer returns and doubtful accounts provide insight into the company’s financial health and its approach to handling potential losses. By regularly reviewing and updating these estimates, companies can maintain accurate financial statements and make informed decisions. Ultimately, effective management of accounts receivable is essential for sustaining business operations and achieving long-term success.

Additonal Resouces

Accounting Course

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