Legal Definitions - accounts receivable

Term: Accounts Receivable (A/R)

Accounts Receivable, often abbreviated as A/R, refers to the money that a business is owed by its customers for goods or services that have already been delivered or performed, but for which payment has not yet been received. Essentially, it represents credit extended to customers, where the business expects to collect payment in the future. These amounts are considered assets for the business because they represent a future economic benefit.

Examples:

• Example 1: A Digital Marketing Agency

  A digital marketing agency completes a comprehensive website redesign and launch for a client company. According to their contract, the client has 30 days to pay the invoice after the project's completion. Once the website is live and the invoice is issued, the amount the client owes the agency is recorded as an account receivable on the agency's financial books.

  How it illustrates the term: The agency has already provided the service (website redesign and launch), but the payment has not yet been collected. This outstanding amount is money owed to the agency by its customer, making it an account receivable.

• Example 2: A Wholesale Food Distributor

  A wholesale food distributor ships a large order of specialty cheeses and gourmet meats to a chain of high-end grocery stores. The agreement allows the grocery stores 45 days to remit payment after receiving the delivery. From the moment the food products are delivered and the invoice is sent, the total amount due from the grocery chain becomes an account receivable for the distributor.

  How it illustrates the term: The distributor has already provided the goods (specialty foods), but the payment is pending. This future payment from the grocery chain to the distributor is an account receivable, representing the value of goods sold on credit.

• Example 3: A Commercial Cleaning Service

  A commercial cleaning company provides daily janitorial services to a large office building throughout the month of October. At the end of the month, the cleaning company sends an invoice to the building management for the services rendered, with payment expected by November 15th. The amount billed for October's services is an account receivable for the cleaning company.

  How it illustrates the term: The cleaning company has already performed the services (janitorial work), but the payment for those services will be received at a later date. The money owed by the building management for the completed work is an account receivable for the cleaning service.