What are accounts receivable?
Published
Accounts receivable are amounts owed to the business by customers for goods or services already delivered but not yet paid for. They sit as a current asset on the balance sheet.
The equations
Days sales outstanding = (Receivables ÷ Revenue) × Days in periodReceivables turnover = Revenue ÷ Average receivablesNet receivables = Gross receivables − Provision for doubtful debts
Al-Waha's figures
DSO = (96,750 ÷ 460,000) × 90 = 18.9 daysReceivables turnover = 460,000 ÷ ((74,300 + 96,750) ÷ 2) = 460,000 ÷ 85,525 = 5.4× per quarter
Nineteen days is good. But receivables rose SAR 22,450 during the quarter - faster than sales grew - so the trend is deteriorating even though the level is fine. Level and trend are two different questions.
Ageing schedule
| Bucket | Amount | Share |
|---|---|---|
| Not yet due | 58,400 | 60.4% |
| 1-30 days overdue | 24,300 | 25.1% |
| 31-60 days overdue | 9,750 | 10.1% |
| 61-90 days overdue | 2,900 | 3.0% |
| Over 90 days overdue | 1,400 | 1.4% |
| Total | 96,750 | 100% |
This table matters more than the headline receivables figure. SAR 96,750 tells you nothing; knowing that 14.5% of it is more than 30 days overdue is actionable.
Provision for doubtful debts
Default probabilities are applied to each ageing bucket:
| Bucket | Amount | Provision rate | Provision |
|---|---|---|---|
| Not yet due | 58,400 | 0% | 0 |
| 1-30 | 24,300 | 0% | 0 |
| 31-60 | 9,750 | 2% | 195 |
| 61-90 | 2,900 | 10% | 290 |
| Over 90 | 1,400 | 50% | 700 |
| Total | 1,185 |
The entry to record it:
| Account | Debit | Credit |
|---|---|---|
| Doubtful debt expense | 1,185 | |
| Provision for doubtful debts | 1,185 |
The provision is a contra account deducted from receivables on the balance sheet, making net receivables SAR 95,565. The rates above are illustrative; each business derives its own from actual collection history.
Bad debt vs. provision
A provision is a probabilistic estimate of debts that may not be collected, raised periodically. A bad debt is a debt confirmed uncollectible - customer insolvency, business closure, or a lapsed claim.
Writing off a confirmed bad debt of SAR 1,400 already covered by provision:
| Account | Debit | Credit |
|---|---|---|
| Provision for doubtful debts | 1,400 | |
| Accounts receivable | 1,400 |
Note that the write-off does not hit the income statement again if the provision was adequate - the expense was recognised earlier, when the provision was raised.
Tax note: writing off a debt may require an adjustment to the VAT previously accounted for on the original invoice. The conditions and procedure are set out in ZATCA's regulations and should be reviewed with a qualified accountant.
How to shorten collection time
- Payment terms written on the invoice, not implied.
- Send the invoice on the delivery date, not at month end - every day's delay in sending is a day's delay in collecting.
- Automatic reminders before the due date, not only after.
- Weekly ageing review at customer level, not in aggregate.
- A credit limit per customer that halts further credit sales when breached.
- Early-payment discounts where cash matters more than margin.
Frequently asked questions
What is the difference between receivables and sales?
Sales are the full revenue of the period, collected or not. Receivables are the uncollected portion at a given date. For Al-Waha: sales of 460,000 and receivables of 96,750.
Is selling on credit a mistake?
No - it is a necessary competitive tool in most sectors. The mistake is granting it without a credit limit, without written terms, and without follow-up.
What is an acceptable collection period?
It depends on the terms you granted. If your terms are 30 days and you collect in 19, you are ahead. If your terms are 30 and you collect in 55, you have an execution problem, not a policy problem.
Does the customer balance include VAT?
Yes. The customer balance is the gross amount owed including tax, because that is what they will actually pay. The split happens inside the entry, between the sales account and the output VAT account.