What are Accounts Receivable?
- July 28th, 2014
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There are plenty of accounting terms you need to know as a business owner. Ever found yourself wondering “what are accounts receivable?” At JRH & Associates, we’re here to help you answer your accounting-related questions!
Accounts receivable is money owed to a company by customers for the goods or services that they’ve already supplied, but for which they have not yet received payment. Receivables are usually established in the form of operating lines of credit through agreed upon terms between two companies, wherein payment will be made within a short period of time, from a few days up to a year.
Most companies will allow some clients to make purchases on credit, typically those who place orders regularly. These customers are then invoiced periodically for whatever they’ve purchased, enabling smoother transactions that aren’t impeded by needing to make payment at the time of purchase.
To put accounts receivable into relatable terms from an individual’s perspective, this kind of arrangement isn’t just limited to business operations. When employees receive a paycheck, usually either bi-weekly or monthly, they’re being paid for work that they’ve already completed. They are legally entitled to this money for the services they’ve already provided (the hours they’ve worked).
The party responsible for handling accounts receivable at a company, whether it’s a department or an individual, uses what’s called a sales ledger in order to record the sales that the business has made, the amount of money that has been received for goods/services, and the amount of money to which the business is owed by customers.
Generally, money that a company receives through its accounts receivable winds up being used toward paying off its accounts payable (LINK): the amount of money that the company owes to others for its receipt of other goods and services. Seeking after accounts receivable is called collection, and applying the money that’s received to accounts payable is called cashiering.
An Example of Accounts Receivable
A contracting company is building a housing unit. To complete the job, it relies heavily on suppliers of various goods and services. Concrete suppliers are needed to come in and lay the foundation, lumber and metal providers deliver the necessary supplies to begin the structural build.
It’s likely that a contracting company would use the same suppliers job-after-job, and as a result of their strong relationship, they would operate on a credit-basis. When the contracting company got a new job, they’d call in their orders for the supplies that they need, and the supplies would be provided. Later on, the contracting company would receive an invoice for those supplies, and would pay the bills accordingly.
Each of those service providers—the concrete, lumber, and metal suppliers—would consider the moneys owed from the construction job as part of their accounts receivable.