accounts receivable
Money owed to a company by its customers for goods or services delivered but not yet paid for — a current asset on the balance sheet.
Example
“The company had $3 million in accounts receivable — invoices sent to customers awaiting payment.”
Memory Tip
Accounts RECEIVABLE = money you will RECEIVE (customers owe you).
Why It Matters
Understanding accounts receivable helps you recognize that a sale is not the same as receiving cash. For personal finances, this concept applies when you lend money to friends or family for services you provide, since you have an asset that represents future payment even though you have not received the money yet.
Common Misconception
Many people assume that when a company records a sale, it automatically has that money in the bank. In reality, accounts receivable shows sales made on credit, meaning the cash will arrive later and there is a risk the customer may never pay, which is why companies must estimate potential bad debts.
In Practice
A plumbing company completes a bathroom renovation worth 5000 dollars for a homeowner on January 15th but agrees to invoice the customer for payment due by February 15th. On January 15th, the company records 5000 dollars in accounts receivable as a current asset even though no money has been received yet. When the customer pays on February 10th, the company removes the 5000 dollars from accounts receivable and adds it to its cash account.
Etymology
ACCOUNTS (financial records) RECEIVABLE (to be received). Money the company will RECEIVE.
Common Misspellings
Small business accounting made simple
Related Terms
More in accounting
Other accounting terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.