What are Accounts Receivables?

Accounts Receivables are the outstanding balances that customers owe to a company for sales made on credit. They arise when a company delivers products or services but allows customers to pay at a later date, increasing short-term assets.

Why are Accounts Receivables Important?

Accounts Receivables are important because they:

• Drive Cash Flow: Represent future cash inflows from credit sales, essential for funding operations.
• Reflect Credit Policies: High receivables may indicate lenient credit terms or collection issues, affecting liquidity.
• Impact Financial Ratios: Influences metrics like days sales outstanding (DSO) and receivables turnover, which assess collection efficiency and working capital management.

How are Accounts Receivables Calculated?

Accounts Receivables are reported on the balance sheet at net realizable value and calculated as:

Accounts Receivables = Gross Credit Sales − Allowance for Doubtful Accounts

Where:

• Gross Credit Sales is the total of all sales made on credit.
• Allowance for Doubtful Accounts is an estimate of receivables unlikely to be collected, based on historical experience and customer creditworthiness.

Additional Considerations

• Aging Analysis: Classifying receivables by how long they’ve been outstanding helps identify overdue balances and adjust allowances.
• Allowance Methods: Companies use percentage-of-sales or percentage-of-receivables methods to estimate bad debts.
• Impact on Cash Flow Statement: Changes in receivables appear in operating cash flows, reconciling net income to cash generated by operations.