Have you ever borrowed money from a friend and promised to pay them back later? In the business world, when a company sells something and the customer promises to pay later, that’s called accounts receivable.
Here’s how it works:
- Selling on Credit: Sometimes, a business sells goods or services to a customer who doesn’t pay right away. Instead, the customer agrees to pay at a later date. This is called selling on credit.
- Money Owed to the Business: The money that the customer owes to the business is called accounts receivable. It’s like an IOU that the customer needs to pay back.
- Tracking Payments: Businesses keep track of all the money customers owe them. They record each sale and the amount to be paid in their accounts receivable.
- Collecting Payments: The business will send an invoice to the customer, which is a bill showing how much they need to pay and by when. The business expects to receive this payment in the near future.
- Importance to the Business: Accounts receivable is important because it represents money that the business will receive soon. This money helps the business pay for its own expenses, like buying supplies or paying employees.
- Example: Imagine you have a lemonade stand, and you let your neighbor take a lemonade now and pay you next week. The money your neighbor owes you is your accounts receivable. When your neighbor pays you back, the money goes from accounts receivable into your cash box.
Understanding accounts receivable helps businesses manage their money and ensure they have enough funds to keep running smoothly.
What is Accounts Receivable?
Have you ever borrowed money from a friend and promised to pay them back later? In the business world, when a company sells something and the customer promises to pay later, that’s called accounts receivable.
Here’s how it works:
Understanding accounts receivable helps businesses manage their money and ensure they have enough funds to keep running smoothly.