Accounts Receivable (AR) is the amount of money owed to a business by its customers for goods or services sold on credit. It is treated as a current asset since it represents expected future cash inflow.
How It Works:
- A business sells goods/services on credit.
- An invoice is issued to the customer with payment terms.
- The amount is recorded as Accounts Receivable.
- The customer pays within the agreed period.
- The receivable is converted into cash.
Benefits:
- Drives sales growth by offering credit to customers
- Improves customer relationships and retention
- Acts as a short-term asset for the business
- Can be used to access financing (AR financing)
Example:
A wholesaler sells goods worth ₹5,00,000 to a retailer on 45-day credit. This amount is recorded as Accounts Receivable until the retailer makes the payment.