What is meant by 'accounts receivable'?

'Accounts receivable' refers to the money that customers owe to a business for goods or services that have been provided on credit. This financial element reflects a company’s sales that are made with the understanding that payment will be received at a later date, rather than immediately. It is considered a current asset on the balance sheet because it is expected to be converted into cash within a year.

When a business sells products or services, it sometimes allows customers to pay at a later date. This results in an account receivable, as the business has a legal right to receive that payment in the future. This concept is crucial for managing cash flow, exploring financing options, and understanding the overall financial health of the business.

In contrast, cash on hand represents liquid assets that the business currently has, debts owed to suppliers are liabilities recorded as accounts payable, and investments in other companies reflect the ownership stake that a business has in another entity, which are classified as non-current assets. Each of these choices represents a different aspect of a company's financial situation, but only the account receivable is directly tied to customer credit transactions.