Accounts receivable are amounts that a company is entitled to receive from its customers for goods or services that have been sold but not yet paid for. They represent money that a business has earned, but has not yet received in cash.
When a business sells goods or services on credit, it records the amount of the sale as an account receivable. The customer is then obligated to pay the business at a later date, typically within 30 to 60 days. The business will then record the payment when it is received and the account receivable will be eliminated.
Accounts receivable are considered to be a current asset on a company’s balance sheet, as they are expected to be converted into cash within one year. They are important for a business because they represent money that the business has earned but has not yet received. They are also important for financial analysis because they provide information about a company’s credit sales and its ability to collect on its credit sales.
It’s important for companies to manage their accounts receivable effectively, by keeping track of who owes them money and when it is due, ensuring that credit is extended only to reliable customers, and following up on overdue accounts promptly. This helps to minimize bad debt and to ensure that the company can collect on its credit sales.