What are accounts receivable?

Accounts receivable are a crucial component of a business's balance sheet, representing the amounts of money that are owed to the business by its customers for products or services that have been delivered but not yet paid for. This financial asset reflects the credit extended to customers and is an essential indicator of a company's cash flow. When a customer purchases goods or services on credit, the business creates an accounts receivable entry, anticipating payment in the future.

Understanding accounts receivable is vital for managing the financial health of a business. It allows companies to track how much money they expect to receive and gives insight into the effectiveness of their credit policies and collection processes. Proper management of accounts receivable can significantly impact liquidity and overall financial performance, making it an important focus for contractors and business owners in managing their operations.