March 03, 2016

What does “accounts receivable” mean?


What does “accounts receivable” mean?

Accounts receivable definition:

“Accounts receivable” refers to money owed to you by your customers for goods or services that you have already provided to them. Your customers might be individuals, corporations, governments, or any other entity. If you’ve made a sale but haven’t gotten paid for it yet, you have a receivable.

Accounts receivable example:

Benjamin has a bakery. Carla is a customer of his and runs a catering company. Carla buys cupcakes from Benjamin for her catered events. 

Carla buys Benjamin’s cupcakes often, but she sometimes doesn’t have enough cash to pay Benjamin immediately; she can only pay Benjamin after she gets paid for her next catering event.

Because Carla is a good customer, Benjamin has agreed to let Carla buy cupcakes on credit. Instead of making Carla pay immediately, Benjamin lets her pay at the end of the month for however many cupcakes she bought from him that month. 

Benjamin’s bookkeeper will count money that Carla owes Benjamin for the cupcakes she bought as an account receivable. (In Carla’s books, it will be recorded as an account payable.)

Why tracking accounts receivable is important:

Keeping tabs on what your company is owed, how quickly you get paid, and your overall balance of credits and debits is a critical part of understanding your company’s financial health.

In the example above, Benjamin needs to keep a close eye on his accounts receivable. If Benjamin makes a mistake in calculating how much Carla owes him or when it is due, he could lose a lot of money. If he makes inaccurate projections about when he will get paid, his cash flow projections could be mistaken, which could have serious consequences. You can read more about the importance of tracking cash flow here.

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Author: Charles Lutwidge

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