What Does Accounts Receivable Mean

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What Does Accounts Receivable Mean
What Does Accounts Receivable Mean

Video: What Does Accounts Receivable Mean

Video: What Does Accounts Receivable Mean
Video: Accounts Receivable and Accounts Payable 2024, March
Anonim

The concept of receivables in most cases applies to a legal entity. However, the definition of such a concept assumes that the receivables represent part of the company's working capital.

What does accounts receivable mean
What does accounts receivable mean

Receivables

Accounts receivable represent the amount of money that an entity expects to receive from its counterparties, that is, partners, customers or others with whom it interacts. In this case, of course, we are talking about amounts for the receipt of which there are certain legal grounds in the form of concluded contracts or agreements.

Accounts receivable can be formed in a variety of ways. For example, it can arise in a business relationship between two commercial enterprises that are long-term partners and therefore trust each other. At the same time, if one of them is a client of the other, then the supplier can provide the client with the necessary goods with a deferred payment. Thus, for some time there will be a situation when the goods have already been delivered to the client, but the client has not yet transferred the funds as payment for this goods. As a result, the amount due to be received as payment will constitute a receivable.

Accounts receivable are usually attributed to the working capital of the enterprise, since usually the company expects that within a certain time it will receive this money and will be able to use it for its own purposes. However, a large amount of accounts receivable can threaten the normal functioning of the company: for example, if it cannot make current payments or repay loans, because the money owed to it has not yet arrived in the company's accounts from the debtors.

Types of accounts receivable

In modern accounting, several main types of accounts receivable are distinguished, which accountants in their professional slang often call simply "accounts receivable". So, if a contract or agreement between an organization and its debtor implies that the debt must be paid within 12 months, then such debt is considered short-term. If the debt repayment period exceeds 12 months, this debt is classified as long-term.

In addition, it should be borne in mind that the receivable is considered normal during the time period provided by the contract. So, for example, if the terms of the agreement between the supplier and the client suggest that the debt must be repaid within a month from the date of delivery, during that month the supplier has no legal basis to bring claims against the client. However, after the expiration of this period, the receivables acquire the character of overdue, and the supplier has the right to go to court to collect it.

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