Accounts Receivable and Financial Ratio Analysis - Coursework Example

The paper “Accounts Receivable and Financial Ratio Analysis” is a cogent example of finance & accounting coursework. Accounts Receivable (AR) can be defined as the money that individual or corporate customers owe another entity in exchange for goods or services that have already been delivered or used by the customer before it is paid for. Schaeffer (2002) also defines accounts receivable as the legal claim of payment that an entity exercises against its customers or clients for services offered or products delivered in respect to the customer’s order.

It means that the firm has sold the product or service but is yet to receive payment. Accounts receivable is provided in form of invoices given by the entity to the customer requesting payment within a specified period of time. It is recognized as a form of operating line of credit and paid within a short-term period of less than one year. A credit term or payment terms is the period within which payment is due. For example, one of the common payment terms included in an invoice is “Net 30 Days” which means that the customer should make payment at the end of 30 days from the invoice date (Welsh et al, 1978).

However, the customer may choose to pay earlier than the date stated in the payment terms. A business may offer a discount for a customer that makes payment before the due date. Other credit terms include Net 30, Net 45, and Net 60 days. If the invoice amount is not paid within the period stated, the creditor (seller) may charge late fees or interest on the debtor (customer). Account receivable payment practices depend on the industry involved. The payment practices are established by industry policies, standards, and corporate policies.

Accounts Receivable is a component classification of receivables in general. It is classified as an asset in the balance sheet (Harris & Hawley, 2001). Accounts receivable are classified under four major categories: current receivables, noncurrent receivables, trade receivables, and nontrade receivables. Current receivables are those that are expected to be collected within a short period not longer than a year or current operating cycle.