What are accounts receivable?

What are accounts receivable?

• A. Amounts owed to a company by suppliers
• B. Amounts owed to a company by customers for sales made on credit
• C. The company's cash reserves available for immediate use
• D. Debts the company needs to settle with banks

Answer: (B)

Accounts receivable represents the amounts that customers owe a company for goods or services that have been provided to them on credit. This type of asset arises when a company makes sales and allows customers to pay at a later date, reflecting the expectation that these amounts will be collected over time. When customers purchase products or services but do not pay immediately, this creates a receivable entry in the company’s accounting records. The balance in accounts receivable translates directly into cash flow for the business once the payments are collected, thus making it a crucial component of working capital management. Proper management of accounts receivable is essential for maintaining liquidity and ensuring that the company has sufficient funds to meet its operational needs. In contrast, the other options do not accurately define accounts receivable. Amounts owed by suppliers are classified differently, as payables, while cash reserves pertain to liquid assets instead of receivables. Similarly, debts owed to banks are considered liabilities rather than assets and therefore do not fall under the definition of accounts receivable.

Accounts receivable represents the amounts that customers owe a company for goods or services that have been provided to them on credit. This type of asset arises when a company makes sales and allows customers to pay at a later date, reflecting the expectation that these amounts will be collected over time.

When customers purchase products or services but do not pay immediately, this creates a receivable entry in the company’s accounting records. The balance in accounts receivable translates directly into cash flow for the business once the payments are collected, thus making it a crucial component of working capital management. Proper management of accounts receivable is essential for maintaining liquidity and ensuring that the company has sufficient funds to meet its operational needs.

In contrast, the other options do not accurately define accounts receivable. Amounts owed by suppliers are classified differently, as payables, while cash reserves pertain to liquid assets instead of receivables. Similarly, debts owed to banks are considered liabilities rather than assets and therefore do not fall under the definition of accounts receivable.