Account Receivable
An account receivable is an amount which a debtor has to pay to the company within time against receiving the products or services from the company. An account receivable is also called trade receivable. Monitoring of account receivable is also very important for a company for follow up from those clients who have not paid their amount due.
Example
ERP Gold sells its software to his client and allowed him to pay within 30 days. Until that time when a company will receive the whole amount, it will be recorded as an account receivable. An account receivable is treated as the current asset on a company balance sheet.
Liquidity Concept
You can consider liquidity as how easy an asset can convert into cash. An account receivable is your receivable bills from your customer. Any receivable shows a sale that is already made by the company. Accounts Receivable is closer to cash as compared to stock inventory.
Account Receivable Adjustment
Sometimes a company is unable to receive full payment from customers. In this case, actual account receivable will be calculated first, account receivable minus an allowance for uncollectible accounts, the actual amount will report on balance sheet Account receivable always comes before inventory because as per account consensus, account receivable is more liquid asset
Evaluate the Liquidity of A/R
Every business needs to generate cash, every asset can convert into cash but when we compare inventory and account receivable, an account receivable is considered as more liquid. It is determined as Account receivable turnover ratio.
It is a metric to evaluate the company capacity how quickly Account receivables is collected. This means converted into cash and to pay it’s operating and other short-term expenses, or current, liabilities. This may be debts or obligations that must be paid or fulfilled within year
If a company has low liquidity measure that will show that the company is having financial problems or properly not managed. The important liquidity measures are net working capital, current ratio, etc.
Account Receivable Turnover Metrics
Account receivable turnover metrics is used to understand whether the company is collected its receivables from their customers. This metric also tells that how successfully a company is selling its products or services and how successfully the company has collected the dues from their customers. Account receivable turnover metric is:
Net sales / Average account receivables = Account receivable turnover
Average receivables are equal to opening receivables plus closing receivables divided by two
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