Accounts Receivable

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Accounts receivable are money owed to a business by its customers from goods or services sold that have not yet been paid for.

Accounts receivable (alternately "receivables") are created when a customer purchases goods or services from a company but does not pay for them at the time of purchase. Instead, the company issues an invoice for the goods or services at a later date, often at the end of the month. The amount due on the invoice is considered accounts receivable for the company. Receivables are treated as current assets on a company's balance sheet. Receivables are entered into a company's books when they receive an invoice for a good or service provision (and not before), as the invoice proves that money is legally owed to the company by an outside entity.

Receivables are typically issued by companies to reliable customers, since they are selling their goods on credit.

Examples

A car dealer buys five cars from Ford Motors but does not pay for the cars at the time of purchase. When Ford issues an invoice to the buyer, Ford also creates an accounts receivable entry on its balance sheet. The accounts receivable are settled once the dealer pays Ford in full for the cars.

For the car dealer, the invoice represents accounts payable, or money they have to pay to another company for already purchased goods or services. When the dealer pays Ford Motors, Ford then converts its accounts receivable to cash on its balance sheet.

Entry at the Time of Issue Invoice:

Car Dealer A/c Dr.

  To Sales A/c Cr.
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