Accounts Receivable: An Entrepreneur’s Definition
Accounts Receivable represents those amounts of money owed to a company by customers for purchases of goods or services. The fact that these amounts of money have not yet been paid is what classifies them as still receivable, and the time frame for which they are receivable is generally within 30, 60, or 90 days from the date when a purchase was made.
Legal status of Accounts Receivable
Since Accounts Receivable represent money due the company, they can be recorded in accounting as current assets, because the money is due to the company within the same accounting year. Receivables can be thought of legally as sales on credit, for which a company will eventually collect the actual cash amount from the customer.
How Accounts Receivable is generated
Accounts Receivable is a very common and broad area in business, and the whole purpose of having Accounts Receivable is to allow customers to receive goods and services immediately, without having to pay for them immediately. This benefits both parties, since customers would make fewer purchases without having that credit option available, and customers benefit as well, because they don’t need to have cash on hand to make a purchase.
Accounting significance of Accounts Receivable
As mentioned, Accounts Receivable are legally considered current assets for a company, and they are very important because they are one big component of a company’s financial liquidity. Accounts Receivable can be converted into cash within a very short time frame, and that’s why they are considered liquid assets, as opposed to say a building which might take months or years to convert into cash. One of the most important accounting indicators regarding Accounts Receivable, is that they represent a higher amount than accounts payable for the same accounting period.
Having issues with your Accounts Receivable?
If your business is having trouble with Accounts Receivable, and late payments are causing cash flow issues, we may be able to help you at Revap Capital Group. Contact us so that our financial specialists can discuss possibilities for funding that will help keep your business running more smoothly during times of cash flow gaps.