Definition:
Accounts receivable is an asset account that represents the amount owed to a company by its customers for goods or services sold on credit. It’s essentially a list of unpaid invoices.
Key points about accounts receivable:
- Credit sales: When a company sells goods or services on credit, the transaction is recorded as a debit to accounts receivable and a credit to sales revenue.
- Collections: When a customer pays the company, the transaction is recorded as a debit to cash and a credit to accounts receivable.
- Customer invoices: Accounts receivable is often based on customer invoices, which are documents that detail the goods or services sold, the quantity, the price, and the terms of payment.
- Credit terms: The terms of payment for accounts receivable are typically stated on the customer invoice. These terms may include a discount for early payment or a due date.
Why is accounts receivable important?
- Cash flow management: Efficiently managing accounts receivable can help improve a company’s cash flow by ensuring that customers pay their bills on time.
- Customer relationships: Maintaining good relationships with customers is important for a business’s success, and timely collection of accounts receivable is crucial for this.
- Financial statements: Accounts receivable is a significant asset that affects a company’s balance sheet and financial ratios.
In essence, accounts receivable is a vital part of a company’s financial operations, representing the amounts owed by customers for goods or services sold on credit.
