What Is Accounts Receivable on a Financial Statement?
Accounts receivable are creditor records of money owed by a debtor. Proper reporting of the debt on financial statements follows Generally Accepted Accounting Principles (GAAP) standards. Most accountants use GAAP to ensure that financial statements are relatively uniform.
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Financial Statement Location
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Accounts receivable are a critical component in calculating a company's net worth. They are classified as an asset since accounts receivable represents money due the company. The company balance sheet is where accounts receivable entries are located and will always contain an entry, even if the amount is zero.
Accounts Receivable Turnover
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The accounts receivable number is used to create valuable financial information other than just the amount owed by creditors. One important measure is the accounts receivable turnover ratio, which calculates how quickly accounts receivable are collected and re-established. The calculation for the turnover ratio is simply total net sales divided by the accounts receivable balance. A high ratio indicates that the company is collecting quickly; a low number indicates a lag in collection. A low turnover ratio can be an indicator that a review of company credit policy is in order.
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Accounts Receivable Collection
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Many companies find it valuable to determine how many days it takes a debtor to repay the company. This is important since the company may not want to give further credit to a debtor that is not repaying timely. The accounts receivable collection period calculation is 365 divided by the accounts receivable turnover ratio. The higher the result, the more quickly a debtor is repaying.
More to Study
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Accounting concepts and financial statements can get complicated quickly, since financial statement components interweave together in multiple ways. The Simple Studies website offers an "Introduction to Accounting" tutorial that explains basic accounting concepts. There are fee-based tutorials on the website, but the basic accounting tutorial is free.
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