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What Is Accounts Receivable? Why Is It Important?

James Smith

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accounts receivable

Money and your customers are the most important aspects of your business. This is why it’s important to understand financial terms and processes.

A very common, and extremely important, term in financial circles is accounts receivable.

What are these and why do they matter? Keep reading to find out.

What Is Accounts Receivable?

If you’ve been looking at a company’s account receivables and didn’t know what it is then you’re in the right place.

Accounts receivable are the amounts of money owed from customers for services or goods that are purchased on credit. Meaning, it’s products or services you’ve sold and performed and are waiting to be paid.

These are tracked on an account in the company’s general ledger and afterward reported on in a line on the balance sheet.

How Does This Differ From Accounts Payable?

Accounts payable is when a company owes debts to other parties such as their suppliers. For example, if company 1 washes company 2’s windows and sends an invoice for their services:

  • Company 2 owes Company 1 money, so it records the invoice as accounts payable.
  • Company 1 is waiting to be paid, so it marks the invoice as accounts receivable.

These two accounting principles are the exact opposite of each other.

Related: Secure Paymentz Banking Software

Why Is Accounts Receivable Important?

The reason accounts receivables are so important is because it measures how liquid a company is, or its ability to cover short-term payments without any extra cashflow.

They’re also important because they help you predict the profitability of the company. It’s also important to keep track of the services you provide on credit or the products you sell so you don’t forget to invoice for them.

If your industry requires you to bill for services or products you perform and get paid for later, you have to have consistent and accurate accounts receivable information.

Tips to Improve Your Accounts Receivable

The first thing you can do to improve your company’s account receivable process is to create a solid plan for invoicing and getting paid for invoices. This means when you first sign up with a client make sure they understand how to pay you and what your payment terms are.

Another way to ensure you’re getting paid is making sure customers receive your invoices. After you send an invoice, follow up in a week just to be sure they got it.

Always document everything when it comes to invoicing and payments. Especially if there’s more than one person invoicing customers. This helps to ensure everything is straight and when it comes time to file taxes it’s a lot easier.

Rock Your Accounts Receivables Today!

Now that you know the importance of accounts receivable and what it is, rock your accounts receivables today. Remember, depending on your industry you may have no choice but to perform work and then be paid later.

If you liked this content, be sure to share it with some of your business friends.

James Smith is the writer for Munchkin Press. He is a young American writer from California and is currently traveling around the world. He has a passion for helping people and motivates others.

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