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The money owed to a company by its customers who have purchased products or services.[sc:kit03 ]
Explanation of Accounts Receivable
Also called simply Receivables and listed on the Balance Sheet, Accounts Receivable are the amounts that customers owe the company. Customers can be any mixture of individuals, other companies or government organizations, and even other divisions within the same company.
This figure is listed because companies often allow credit sales to customers, who then pay at a later date. This figure is typically not simply the total sales on credit, but the total credit sales minus the total sales that the company has estimated to be un-collectable. This un-collectable amount is often called the “allowance for doubtful accounts” or “allowances”. In relation to accounting practices, Accounts Receivable is often used in the accrual basis of accounting.
Importance of Accounts Receivable
The allowance for doubtful accounts can be a factor in determining how well the company can collect income from credit sales. If the Accounts Receivable increased over a period of time but the allowances increased at a faster rate, then this may be a negative sign that the company is having trouble collecting sales revenue from their customers, and is usually never a good indicator.