What is Accounts Receivable? Definition of Accounts Receivable, Accounts Receivable Meaning
A receivable is an account that has a debit balance on the balance sheet of the company. These represent a set of rights in favor of a company against third parties for the prior provision of a service or the sale of a product. Therefore, the accounts receivable are the result of the daily economic activity of the company.
These accounts receivable represent a credit that the company grants to its clients, thus helping to finance their economic activity. In this way, the accounts receivable represent for the company that grants the credit, money that is pending collection for the sale of goods and / or services. On the other hand, for the company that receives the loan, they will have just the opposite consideration ( accounts payable ).
Depending on the period of time available to settle the collection right, these can be classified as short-term receivables (less than 12 months) or as long-term receivables (more than 12 months). Long-term receivables must be reclassified at the end of the fiscal period as short-term receivables, if the credit matures in the next 12 months.
Account Receivable Posting Example
Suppose that company X has sold merchandise worth € 20,000 to company Y. Let us also suppose for simplicity that the sale is VAT- free and that company X issues a trade note payable in 90 days.
|430 Customers 20,000||701 Sale of merchandise 20,000|
|431 Customers, commercial bills receivable 20,000||430 Customers 20,000|
In the first place, an accounting entry would be made in the credit with the merchandise sale account for € 20,000 and another entry in it owes to the customer account. Given that this collection right is going to be settled through a commercial paper within a period of 90 days, another entry would be made in which the Clients account would be canceled against the Clients account, commercial papers receivable.
In this way, company X would be financing the purchase of the goods from company Y, having granted it a commercial credit for 90 days.