Accounts receivable

Accounts receivable (AR) are the amounts of money owed by customers that the business is legally entitled to receive. When a business sells goods or provides services on credit, it creates accounts receivable. 

These are basically IOUs (short for “I Owe You,” informal documents acknowledging debt) indicating that the customers have received the goods or services but have not yet paid for them. 

Accounts receivable are considered a current asset on the company’s balance sheet because the business expects to collect this money within a certain period (usually within a few weeks or months, based on the agreed terms).

For example, a hotel chain offers corporate clients the option to pay for accommodation and services on credit. After a traveler stays at one of their properties for a conference, the hotel issues an invoice with a net 30-day payment term. The amount owed by the corporate client for all rooms, meals, and additional services becomes part of the hotel chain’s accounts receivable until it is paid.

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