Definition
Accounts receivable are amounts customers owe a business for goods or services already delivered on credit. They are current assets on the balance sheet and are tracked per customer so that each invoice can be collected, chased or written off. Receivables turn profit into cash only when customers actually pay.
How it works
A credit sale debits receivables and credits revenue (and output VAT where it applies); the customer's payment debits the bank and credits receivables. Tagging each line with the customer as a party gives the balance per customer and an ageing report.
The main measure is days sales outstanding (DSO): how many days of sales are tied up in unpaid invoices. A DSO creeping up from 35 to 55 days can drain cash even while sales grow. The cash conversion cycle calculator puts DSO in context with inventory and payables.
Review the ageing monthly, follow up overdue invoices early and record an allowance for doubtful debts (a contra account) for balances unlikely to be collected.
Formula
DSO = Trade receivables / Credit sales x Days in period
Receivables turnover = Credit sales / Average receivables
Example: sale and collection
A 6,000 credit sale on 10 May is collected on 9 June.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 10 May | Accounts receivable: Cedar Studio | 6,000 | |
| 10 May | Sales revenue | 6,000 | |
| 9 Jun | Bank | 6,000 | |
| 9 Jun | Accounts receivable: Cedar Studio | 6,000 |