Business

More Than a Definition: What Is Accounts Receivable?

You’ve been tasked with putting together a balance sheet, but you’re panicking about all of the terms and what they mean. 

Business accounting can be a foreign subject for most — especially when it comes to wrapping your head around what is accounts receivable accounting. Luckily, we’ve got you covered when it comes to answering what is accounts receivable and why it’s important.

Keep reading to brush up on your accounting skills, or learn something new!

Defining What Is Accounts Receivable

The easiest way to understand what is accounts receivable is by looking at the two words that make up the term.

Accounts receivable is the money that’s owed to a company by other businesses or customers in exchange for services or goods that have been provided — usually for credit and due within a short period. Typically, it’s when a company bills another company or customer and is awaiting this expected payment.

What Do You Use It For?

Accounts receivable is used to track the money that is expected to come into your business.

You will see the term pop up on a balance sheet or a cash flow report to keep track of any outstanding balances owed to the company. You will also see accounts payable on there to keep track of money going in and out of the company.

It’s important to be familiar with the terms and what they’re tracking to have accurate accounting ledgers. 

What would appear on your business’s accounts receivable will show up on the owing individual’s accounts payable. This is how the exchange process works when someone has procured your services or products without paying you upfront.

What About Accounts Payable?

You may be wondering what is the difference is between accounts receivable and accounts payable, and it’s easy. Even though it’s often confused with accounts receivable, accounts payable is the opposite. 

Accounts receivable receives money, and accounts payable is what is owed to someone else. For example, accounts payable would include employee salaries, utilities, rental costs, and any other upholding and overhead costs.

Why Track Accounts Receivable & Accounts Payable?

It’s important to track the money coming in and out of your business so that you know what amounts are coming in and when to expect them. A business will be able to determine where they stand financially and prevent any shortages from occurring.

In the event there are shortages, tools like AR financing exist to bridge the outstanding amounts for a period of time. This is like a loan for accounts receivable.

Now You’ve Got It!

With this guide, you should be able to answer the question, “What is accounts receivable?” Knowing this information will help ensure that the right items are in the right place on balance sheets and cash flow reports. Hopefully, this should create a little less panic and a lot more confidence in understanding one of the important accounting basics.

Like what you’ve read? Be sure to check out our business section for more accounting tips and tricks!

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