What are Accounts Receivable?

Many aspiring accounting and business students may be unsure about what are accounts receivable. It is a business accounting term that actually has a very simple meaning. Read on to learn about what it is, what it entails and why it is important for all businesses.

Related resource: The Top 15 Best Affordable Online Master’s in Accounting Degree Programs

The Definition Of Accounts Receivable

What are accounts receivable? Accounts receivable is simply the amount of money owed to a business by its customers for services rendered. This can be in the form of due invoices, items purchased on credit or other occurrences where the company has not yet been paid for something they provided. Customers have a legal obligation to pay these debts. This term usually only refers to money for goods or services that have been used or delivered but not yet paid for. Not every business works under a model like this, but many do, especially professional service industries.

The Importance Of Accounts Receivable

Perhaps obviously, accounts receivable is critically important for every type of business. No business can stay in operation for long if it is not paid by its clients. Data from accounts receivable is used by accountants and managers to prepare budgets, and according to Investopedia, companies typically include accounts receivable amounts on their balance sheets because it is money they are entitled to. It is also useful information for marketing professionals to have so they know whether a strategy they are using is working or not, as well as stopped working after enjoying success for some time. Professionals working in accounts receivable also need to make sure their invoices are completely accurate to avoid issues.

Who Handles Accounts Receivable

Typically, accounting professionals at a business handle accounts receivable. Smaller businesses may only have one accountant managing all customer accounts while others have enough customers that different accounting professionals are responsible for several different accounts. In cases of a sole proprietorship, such as a freelance business, the owner may be the one to send out invoices and track payments received. Whoever is responsible for a certain account is the one who ensures invoices are correct and sent out in a timely manner. They also use automated software or reach out to clients personally to remind them of invoices that are past or coming due. Sometimes they may need to work out payment plans with clients who cannot pay the entire amount right away.

How Companies Can Get Customers To Pay

Getting customers to actually pay is always a potential issue in the accounting profession. There are, however, several methods accounting professionals use to bring any late accounts current. Many professional services require a portion of the final payment upfront, usually 20-50%, as a way to only work with clients who are serious about completing a project. Charging late fees is an option. Offering several different ways to pay is always a good idea because it gives customers more options who may have difficulty paying through a single method. Automated reminders and accepting digital or recurring payments can help ensure a company gets paid as well. As a last resort, delinquent accounts can be sent to collections attorneys in an effort for a business to recoup money owed to them.

Accounts receivable is a basic but critically important component of nearly all businesses. The information presented above has hopefully been useful for anyone wondering what are accounts receivable.