This article will give you a comprehensive answer to the question of what accounts receivable definition? Accounts receivable are legally enforceable claims for payment held by a business for goods and services supplied on credit. We can probably say that this is in the form of an invoice that is made between a business and a customer for payment within an agreed time frame. In most cases, when balancing their sheet, they account for this for the asset.
Accounts Receivable Definition
Accounts receivable could also be used interwoven as a trade receivable. Furthermore, it could be distributed electronically or via mailing as they agree to pay in a particular time called credit terms or payment terms. Here are what appears on the record; the sales a business has made, the amount of money received for goods or services, the amount of money owed at the end of each month.
There are set of teams set out to receive the refunds on behalf of a company known as receivable teams.
Uses of Account Receivable
- Companies can use their accounts receivable as collateral when obtaining a loan. Like I said it is simply asset-based lending.
- They can sell them via factoring or on an exchange.
- They are used for reporting financial purposes. Through this record, you can detect your financial report positively or negatively. However, they are reported in the company’s balance sheet.
- The strength of a company’s AR can be analyzed with accounts receivable analysis.
- Accounts receivables are created when a company offers a buyer purchase of goods on credit.
Benefits of Account Receivable
As long as accounting is important to the business’s financial department, so as Account Receivable also adds value to the account balance sheet. It is used to measure a company’s liquidity or ability to cover short-term obligations in the absence of extra cash flow. Also, it measures the average sales outstanding analysis over a specific period.
Example of Accounts Receivable
Let’s take a fridge manufacturing company as an example that bills its clients after the clients must have received the electricity. Now this company will have to record an account receivable for unpaid invoices as they await their customers to pay their bills. This requires a lot of trusts. This is why most companies issue goods on credit to their frequent customers while some operate by allowing a portion of sales to be on credit.
Thus, it allows customers to avoid the hassle to make physical payments for any transactions. Often cases, it is a business strategy as they offer all of their clients the ability to pay after receiving the goods or services.