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An Accounts Receivable Is Created When…

Accounts receivable is a term commonly used in accounting and finance that refers to the money owed to a business by its customers for goods or services provided on credit. When a business sells its products or services on credit, it creates an accounts receivable.

Here are some common scenarios where an accounts receivable is created:

1. Selling goods on credit: When a business sells its products to a customer and allows them to pay at a later date, an accounts receivable is created. The business records the sale as revenue and creates an accounts receivable for the amount owed.

2. Providing services on credit: Similar to selling goods, when a business provides services to a customer and allows them to pay later, an accounts receivable is created. The business records the service revenue and creates an accounts receivable.

3. Installment payments: In some cases, businesses offer installment payment plans to their customers. When customers agree to pay in multiple installments, an accounts receivable is created for each installment due.

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4. Billing for ongoing services: If a business provides ongoing services, such as monthly subscriptions or maintenance contracts, it creates an accounts receivable each time a billing cycle is completed.

5. Late payment penalties: When customers fail to pay their invoices on time, businesses may charge late payment penalties. These penalties create additional accounts receivable for the business.

6. Returns and allowances: If a customer returns a product or receives an allowance for a defective product, the original accounts receivable is adjusted accordingly.

7. Financing arrangements: In some cases, businesses may sell their accounts receivable to a third party for immediate cash. This is known as accounts receivable financing or factoring.

FAQs:

1. What is the difference between accounts receivable and accounts payable?
Accounts receivable represents money owed to a business, while accounts payable represents money owed by a business to its suppliers or creditors.

2. How are accounts receivable recorded in the financial statements?
Accounts receivable are recorded as an asset on the balance sheet and are usually reported at their net realizable value.

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3. How do businesses manage accounts receivable?
Businesses manage accounts receivable by sending invoices, tracking payments, following up on overdue accounts, and implementing credit policies to minimize the risk of bad debts.

4. What is the accounts receivable turnover ratio?
The accounts receivable turnover ratio measures how efficiently a business collects its accounts receivable. It is calculated by dividing net credit sales by the average accounts receivable.

5. What are bad debts?
Bad debts are accounts receivable that are unlikely to be collected. Businesses may write off bad debts as an expense.

6. Can accounts receivable be sold to a third party?
Yes, businesses can sell their accounts receivable to a third party through accounts receivable financing or factoring.

7. How long does it take to collect accounts receivable?
The collection period for accounts receivable varies depending on the business and industry. It can range from a few days to several months, depending on the credit terms and payment behavior of customers.
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