Account Receivable Definition
Accounts receivable refers to the money that a company is owed from its customers for goods or services that have been delivered or used but not yet paid for. Accounts receivable is considered an asset on a company’s balance sheet because it represents future cash flow.
Most businesses extend credit to their customers, which means they allow them to purchase goods or services now and pay for them later. When a business does this, it records the transaction as an accounts receivable on its balance sheet. Accounts receivable is therefore the amount of money owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.
Accounts receivable is considered an asset because it represents future cash flow. That is, the money owed to a company by its customers will eventually be received, at which point it can be used to pay off debts, reinvest in the business, or give the shareholders a return on their investment.
While accounts receivable is an important part of many businesses’ operations, it also comes with some risk. First, there is always the possibility that a customer will not pay what they owe, which could lead to bad debt expense. Second, when accounts receivable gets too high, it can tie up too much of a company’s resources in uncollected funds and make it difficult to pay its own bills on time. This is why businesses must carefully manage their accounts receivable and extend credit only to those customers who are likely
