Learning The Basics Of Accounts Receivable

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Accounts receivable is an account that represents the amount of revenue a company has earned but has not yet collected. It is the side of accounting that should have its own department in a business, with dedicated resources toward maintaining, monitoring, and collecting these accounts.

Some businesses, however, have failed not because they were not profitable but because they were not collecting on sales, resulting in their cash flow being inadequate. Companies that sell products or supplies to buyers on account generally maintain a balance in accounts receivable. When new sales are made, there is an increase in the balance; when debts are paid, the balance decreases. Sales on account are regarded revenue at the time they are made in accrual-based accounting. When a company makes a sale on account, the balance increases. Cash balance is debited or increased when payments are collected. This is different from accounts receivable where it is credited or reduced.

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Accounts receivable permits a company to make more sales, and in large volumes, to buyers who can’t pay for upfront charges with cash. Offering advantageous credit terms, a business can encourage buyers to make purchases when it is needed, not only when they have the finances to pay for them. However, being too flexible with the credit can have the potential to cause an exorbitant amount of bad debt write-offs.

Businesses send invoices to buyers that owe them after an account sale. In an invoice, terms are laid out, including the balance owed, due date, and interest rate details. The accounts receivable turnover ratio is a common tool used to measure a company’s proficiency in collecting payments.

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