Have you ever asked how companies handle their money when customers don’t pay right away for the goods they buy? Who owes them money, and how do they keep track of that? Well, my curious friends, the answer lies in a powerful tool called accounts receivable. Just imagine you have a small business and you sell a product or service, like homemade cookies.

And at times customers don’t pay you right away. That’s where accounts receivable come into play. Let’s check out this term and how companies use them. 

What is Accounts Receivable? 

Accounts receivable is like a special list that businesses use to keep track of all the money their customers owe them. It’s similar to when you lend your friends some money and they say, ”I’ll pay you back later.” You will write their names and the amounts they owe you. Well, businesses do something similar with their customers. 

So if you sell your product or services, customers might not have the money at that very moment. Instead, they promise to pay you back later. And now you create an accounts receivable entry for each customer, recording their name and the amount of money they owe you. It’s like having a bunch of IOUs, or “I owe yous.”

Why Do Businesses Use Accounts Receivable?

Now as you know, accounts receivables are something that cannot be neglected. Businesses have to bother about them because of the following reasons: 

• Managing Finances: Keeping track of accounts receivable helps businesses stay organized and know how much money they are owed. It’s like having a map to navigate their finances.
• Cash Flow: The movement of money into and out of business is something very essential. And here as well accounts receivable will play a vital role because when customers pay back the money they owe, it will go into the business’s cash flow. 
• Trust and Relationships: Businesses will like to build strong relationships with customers. When you allow them to pay later through accounts receivable, you showcase trust and flexibility, which can lead to loyal customers who keep coming back.

How Does Accounts Receivable Work?

Suppose you have a cookie stall, and your friend buys a tasty cookie from you. Instead of paying you right away, he says that he will pay you back next week. You note down his name and the amount he owes you in your accounts receivable.

Now let’s say more friends come and buy lemonade on different days, with each promising to pay you later. You keep adding their names and the amounts they owe you to your accounts receivable list.

As they start paying you back, you start removing their names from the list. You can effectively keep track of money your friends owe you. The same is the case with businesses!

Conclusion 

We hope that you have understood the concept of accounts receivables. Remember, it is a list of customers who owe money to a business for products or services they’ve purchased. And if you require any assistance with it, you may contact KPG Taxation, a reputed taxation company. It has expert tax accountants who can help you tackle accounts receivable and help balance your finances.