Accounts receivable, abbreviated as AR or A/R,[1] are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for.
Accounts receivable are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame.
Accounts receivable represents money owed by entities to the firm on the sale of products or services on credit.
In most business entities, accounts receivable is typically executed by generating an invoice and either mailing or electronically delivering it to the customer, who, in turn, must pay it within an established timeframe, called credit terms[citation needed] or payment terms.
In order to achieve a lower DSO and better working capital, organizations need a proactive collection strategy to focus on each account.
The debtor is free to pay before the due date; businesses can offer a discount for early payment.
These types of payment practices are sometimes developed by industry standards, corporate policy, or because of the financial condition of the client.
Since billing is done to claim the advances several times, this area of collectible is not reflected in accounts receivables.
The allowance method can be calculated using either the income statement method, which is based upon a percentage of net credit sales; the balance sheet approach, which is based upon an aging schedule in which debts of a certain age are classified by risk, or a combination of both.
However, for financial reporting purposes, companies may choose to have a general provision against bad debts consistent with their past experience of customer payments in order to avoid overstating debtors in the balance sheet.