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What is Accounts Receivable?
Accounts receivable, sometimes called A/R, is an accounting term used to refer to the money that customers owe a business. Accounts receivable are considered to be an asset, since it is money that will be coming into the company. The company bills the debtor for the goods or services the company has provided. Sometimes, a customer will pay the company right away, while other times the company bills a customer for later payment.
Why is it Important to Keep Track of Accounts Receivable?
It is important to keep track of accounts receivable because they are the clearest indicator of the income of a business. If you do not keep track of accounts receivable, you may forget to bill certain customers or will not know if you've been paid. Accounts receivable gives you a clear idea of how much money your company is actually making (when compared to accounts payable, which is how much you owe to suppliers or vendors). This could lead to a person spending more than their business is making simply due to a lack a knowledge, which could have terrible consequences for the business. Keeping track of accounts receivable is also a great way to have documentation supporting proof of income at tax time.
Comparing A/R to A/P
In order to find out if a business is making a profit each month, as well as how much that profit is, that business must have clear records of both their A/R and A/P (accounts payable) for that month, as well as records of many other transactions. The total of the accounts receivable alone is not the only thing that measures the profit of a business. In order to discover the profit for a given month, plug all of the expenses and income for a business into a profit and loss statement. The statement will tell a business owner the true profit of the business for the month. If the remainder is negative, then the business was losing money in that given month. This can also be done on daily, weekly, quarterly, and yearly scales. Knowing the profit of a business can assist the business owner in making many spending, marketing, and service decisions.