Changes in accounts receivable (AR) on the balance sheet from one accounting period to the next must be reflected in cash flow. If AR decreases, this implies that more cash has entered the company from customers paying off their credit accounts—the amount by which AR has decreased is then added to net earnings.

What causes accounts receivable to decrease?

The amount of accounts receivable is increased on the debit side and decreased on the credit side. When cash payment is received from the debtor, cash is increased and the accounts receivable is decreased.

Is a decrease in accounts receivable good or bad?

When a company has high levels of receivables in relation to its cash on hand, this often indicates lax business practices in collecting its debt. Low levels of receivables are another cause for a concern, as this sometimes means that the company's finance department isn't competitive with its terms.