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.
Coca-Cola
Coca-Cola by rick, on Flickr
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.

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

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Trackbacks/Pingbacks

  1. Accounting Made Easy by the Accountinator « Homepreneurs's Blog - 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 […]

  2. Accounting Made Easy by the Accountinator – Latest News, Videos, and Information about USA Jobs - 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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