Accounts receivable is a fundamental building block in business finance. Here’s what it means.
If you are just getting to learn about business, accounting is one side with which you should become familiar. Accounts receivable is just one part of the equation. Don’t worry; it’s simple. Moreover, if you do end up accepting credit card payments, Pure Finance Group can help you save money with our payment processing services. Below, we shall answer the question, “What are accounts receivable?”
What Are Accounts Receivable?
Accounts receivable are a line of credit from one person or business to a business. They form an accounting section recording the total balance owed to a business. If a customer orders a product or service from a business on credit, the business will record that amount (the balance) in its accounts receivable section. In short, accounts receivable are the balances that customers owe a company.
Accounts Receivable and the Bigger Picture
The balance is a short-term IOU, a liquid asset that a company has on record. Within a year at most, that balance should turn into cash. Once the customer pays the balance, the amount will move from the accounts receivable to the company’s working capital section, its cash.
In business finance, there is a standard of health for the accounts receivable. It should not be too high or too low in relation to the other accounts, such as accounts payable and capital. Healthy accounts receivable show that the company gives customers enough leeway in paying in credit and that customers do pay in a reasonable time. Accounts receivable are considered a benefit to companies because they form a liquid asset, a commodity they can turn into cash if necessary in a short time.
Accounts Receivable vs. Accounts Payable
Accounts payable is the inverse of accounts receivable. When a business receives a product or service from another business but has not paid for it yet, the balance will show up in its accounts payable; it is what one business owes to another.
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