Accounts receivable is what customers owe a business for goods or services it has already delivered and has not yet been paid for. Under the US revenue standard a receivable is an entity’s right to consideration that is unconditional, and a right to consideration is unconditional if only the passage of time is required before payment of that consideration is due (FASB Accounting Standards Update 2016-13, paragraph 606-10-45-4). It is a current asset, written A/R or AR, and “accounts receivables” is the same balance carrying an extra plural.
How Accounts Receivable Is Carried on the Balance Sheet
Receivables are not one undifferentiated number. On a balance sheet filed under Regulation S-X, accounts and notes receivable is a line item under the current assets caption, and amounts receivable are stated separately for customers (trade), for related parties, for underwriters, promoters and employees whose balances arose outside the ordinary course of business, and for others (17 CFR 210.5-02).
What the business does not expect to collect is not quietly netted into that figure either. Allowances for doubtful accounts and notes receivable are to be set forth separately in the balance sheet or in a note to it (17 CFR 210.5-02).
That allowance is a contra account rather than a reduction of the receivable itself. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net amount expected to be collected (FASB Accounting Standards Update 2016-13, paragraph 326-20-30-1). The receivable stays gross, the estimate sits against it, and the net of the two is what the business expects to turn into cash.
The tax return keeps the same shape. The corporate balance sheet asks for trade notes and accounts receivable on one line, with less allowance for bad debts on the line directly beneath it (IRS, Form 1120, Schedule L, lines 2a and 2b).
The book allowance is not itself a deduction, since the tax side turns on a debt becoming worthless within the taxable year (26 U.S.C. 166) rather than on how long a balance has been sitting, and that gap is worked through in how to read an aging report.
Trade Receivables, Notes Receivable and Other Receivables
Trade receivables are the ordinary case and the one the bare term almost always means: amounts owed by customers for goods or services sold in the normal course of business. When a business says it is owed money, this is the balance it means.
A note receivable rests on a written promise to pay rather than an open invoice, and once notes get large enough the counterparty detail has to be reported for each of the two balances rather than once for the combined total. If the aggregate amount of notes receivable exceeds 10 percent of the aggregate amount of receivables, the split between customers, related parties, underwriters, promoters and employees whose balances arose outside the ordinary course of business, and others has to be set out separately, in the balance sheet or in a note, for accounts receivable and for notes receivable (17 CFR 210.5-02).
Other receivables are amounts owed by someone other than an ordinary trade customer: balances due from related parties, from underwriters, promoters and employees whose balances arose outside the ordinary course of business, and from anyone else. They travel under the receivables heading without being trade receivables, so a ratio built on the total balance is measuring something other than how fast customers pay.
Why Accounts Receivable Exists Only Under Accrual Accounting
Under an accrual method of accounting, you generally report income in the year it is earned and deduct or capitalize expenses in the year incurred (IRS Publication 538). Earning the fee and collecting it are two separate moments, and the receivable is the asset that carries the amount across the gap between them.
Under the cash method, you include in gross income all items of income actually or constructively received during the tax year (IRS Publication 538). A pure cash-basis set of books therefore has no accounts receivable balance at all, because nothing is recorded until the money arrives. Unwinding receivables is the first thing that happens when a client moves between the two bases, which is its own exercise and is worked through in the accrual to cash adjustment.
Where the Balance Lives in a Firm’s Ledger
The general ledger carries one accounts receivable control account, a single balance for everything customers owe. The detail sits in the open-invoice subledger behind it, one row per unpaid invoice per customer, which is the list any aging report is built from.
The subledger total has to agree to the control account. What happens to the balance between the invoice and the cash, from credit terms through to cash application, sits in accounts receivable best practices.
What Accounts Receivable Is Not
It is not revenue. Revenue is the income statement event that happens when the work is delivered. The receivable is the balance sheet consequence of not having been paid for it yet, so collecting the invoice later moves the amount out of receivables and into cash and creates no new revenue.
It is not accounts payable. The two are the same transaction seen from opposite sides: the seller books a receivable and the buyer books a payable for the same invoice, in the same amount.
It is not a contract asset. When an entity has transferred goods or services and the right to payment still depends on something other than the passage of time, the entity presents the contract as a contract asset, an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer, excluding any amounts presented as a receivable (FASB Accounting Standards Update 2016-13, paragraph 606-10-45-3). The amount becomes a receivable once that right is unconditional, so unbilled work in process can already be a receivable and whether an invoice has gone out is not the test.
Common Questions
An invoice for a tax return already delivered to a client and still unpaid at the reporting date is a receivable. So is a shipment billed on delivery and sitting inside its agreed terms, and a monthly retainer invoiced after the month it covers. Money collected before the work is done is not a receivable at all but an obligation to do the work, and an engagement letter signed with no work performed yet is neither.
It means running the invoice-to-cash side of the ledger: raising the invoice, applying each payment to the invoice it belongs to, and following up on what is past due. The titles that do that work, and how they differ from each other, sit in an accounts receivable job description.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a real block of its own receivables work through a trial task before anything client facing depends on it.
