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Accounts receivable explained
Accounts receivable is money owed to you by your customers for merchandise purchased.
Suppose you are a wholesaler who ships merchandise in truckloads to your customers. You ship goods to customers’ loading docks, where workers can unload the trucks. Here’s the problem: those workers usually can’t pay you for the merchandise. They are truck-unloaders, not check-writers-and-signers. Therefore, you have no choice but to extend credit to your customers, and wait until the paperwork makes all the way to your customer’s check-writers-and-signer, who mail you the check.
Furthermore, because your competitors extend credit to your customers, you, too, may be forced to do the same. Putting a customer on “C.O.D.” (“Cash on Delivery”) is often like telling that customer to use a different supplier.
Accounts receivable terms are typically described like this: 2/10 net/30. This means that the customer is entitled to a 2% discount if they pay within 10 days, and the full balance is due within 30 days.
For many businesses, accounts receivable is a necessary evil. They need to extend enough credit to keep their customers happy and to sustain their sales. However, they should avoid lending to credit-unworthy customers, and try to collect accounts receivable as quickly as possible.
5 Responses to “Accounts receivable explained”
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April 2, 2012
[…] did you learn in high school or college? A few terms here and there and the difference between accounts receivable and accounts payable. If a few accounting classes were taken, one might understand the difference […]
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April 7, 2012
[…] did you learn in high school or college? A few terms here and there and the difference between accounts receivable and accounts payable. If a few accounting classes were taken, one might understand the difference […]
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