Meaning and composition
Accounts receivable are claims a company has against other parties. Most often, they are amounts customers owe for goods delivered or services provided. The line may also include other claims, so its balance-sheet label should always be read together with the notes.
Revenue recognition and collectability
If a company ships products to a customer with deferred payment, revenue may be recognized before the cash is received. Until payment, the accounts include a claim against the customer. If the customer begins to experience financial difficulty, the company must assess how likely collection is; the claim’s nominal amount does not guarantee a future cash receipt.
What to assess
Accounts receivable should not be confused with the company’s own debts. Investors should examine repayment dates, the overdue share, concentration among individual customers and allowances for possible losses. Rapid growth in receivables alongside weak growth in cash inflows may indicate deteriorating sales quality.