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If a company extends credits for goods or services offered to the customer, the amount owed to the seller is accounts receivable, which can be converted to cash on a future date, hence, accounts receivable serves one of the examples of assets in accounting.
For this reason, the account receivable is mentioned on a balance sheet under current assets - as it is convertible mostly in less than 1 year but in conditions when it takes more than a year to convert into cash, it is recorded as a long-term asset on the balance sheet.
The term is used as an example of liquid assets with the ability to cover the short term obligations without extra cash flow.
If the receivables are never collected, it is recorded as bad debt related to the accounts receivable.
Firms need to record such entries as it is a legal obligation to pay the liquid or illiquid debt.
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