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Glossary Term

Accounts Receivable

Accounts Receivable — definition

Outstanding short-term dues that a vendor or entity owes you.

What Accounts Receivable means in practice

Accounts Receivable (A/R):

  • Represents the money owed to a business by its customers for goods or services purchased on credit.
  • Considered assets on a company’s balance sheet as they signify the expectation of receiving cash in the near future.

Origin:

  • Stems from credit sales transactions where a business allows customers to receive goods or services with a promise to pay later.

Management Importance:

  • Cash Flow Management: Ensures a steady inflow of cash to cover expenses and maintain positive cash flow.
  • Reduced Bad Debt: Effective credit policies and collection processes minimize uncollectable A/R (written off as bad debt).
  • Improved Profitability: Timely collection translates to increased profitability.

Additional Points:

  • A/R Turnover Ratio: Measures how efficiently a company collects outstanding debts.
  • Credit Options: Businesses might offer varying credit terms (e.g., net 30) or extended payment plans.

In essence, A/R reflects the money a company is expecting to receive from customers, highlighting the significance of effective management for a business’s financial health.

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