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Simple English definitions for legal terms
account receivable
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A quick definition of account receivable:
Account Receivable: When a business sells something to another business or person on credit, they create an account receivable. This means that the buyer owes the seller money for the goods or services they received. The seller keeps track of this money owed in their books as a current asset. Once the buyer pays the full amount, the account receivable is replaced with cash.
A more thorough explanation:
Definition: Accounts receivable (A/R) is the money that a business is owed by another business or individual for goods or services provided on credit. The business sends an invoice to the customer to request payment. A company records accounts receivable as a current asset on its balance sheet.
Example: A clothing store sells $500 worth of clothes to a customer on credit. The store records an account receivable of $500 on its books. Once the customer pays the full amount, the accounts receivable is replaced with cash.
Explanation: This example illustrates how a business records accounts receivable when it sells goods or services on credit. The store provides clothes to the customer and sends an invoice requesting payment. The customer owes the store $500 until they pay the full amount. The store records the $500 as an accounts receivable on its balance sheet until the customer pays the full amount.