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Accounts receivable

Accounts receivable, also known as AR, are the unpaid invoices or money that a company is waiting to receive from its customers. 

It represents the amount owed to the company for goods or services that have been provided but not yet paid for. Businesses consider accounts receivable as an asset because they have a legal right to receive payment from their customers. 

These receivables can be used as collateral to obtain short-term loans and are included in a company's working capital.

Main Points:

  • Accounts receivable are an important part of analyzing a business's financial health.
  • Accounts receivable help assess a company's liquidity or its ability to pay its short-term obligations without needing more cash.
  • It provides insights into the company's ability to manage its cash flow and meet its financial obligations.
  • If a company determines that a customer will not be able to pay their accounts receivable, it needs to be written off as a bad debt expense or one-time charge.

Suppose a customer walks into a store and buys a widget for 100 AED. The store doesn't require the customer to pay for the widget upfront, so the customer takes the widget and promises to pay the store at a later date.

In this case, the store would record the 100 AED owed by the customer in the accounts receivable account. The store would continue to show the 100 AED in accounts receivable until the customer pays for the widget. 

Once the customer makes payment, the store would reduce the accounts receivable amount by 100 AED and record the payment  from the debtor.

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