balance sheet

Accounts Receivable

Accounts Receivable Jonathan Poland

Accounts receivable (AR) are the outstanding amounts owed to a business by its customers for goods or services provided on credit. Essentially, accounts receivable represent the money that a company is entitled to receive from its customers, usually within a specified time frame (e.g., 30, 60, or 90 days).

When a company sells goods or services on credit, it creates an invoice for the customer. The invoice specifies the amount due, the terms of the sale, and the due date for payment. The unpaid portion of these invoices becomes the company’s accounts receivable.

Accounts receivable are considered as current assets on a company’s balance sheet, as they are expected to be collected within a short period of time, typically less than one year. Efficient management of accounts receivable is critical to a company’s cash flow, as it ensures that the company can receive the funds it needs to cover expenses, make investments, or pay its own debts.

Examples of Receivables

Receivables, or accounts receivable, can come in various forms depending on the nature of a business and its transactions. Here are some common examples of receivables:

  1. Sales on credit: When a company sells goods or services to a customer on credit terms, it creates an invoice that specifies the amount due, the terms of the sale, and the payment due date. The customer is expected to pay the invoice within the specified period. Until the payment is received, the outstanding amount is considered a receivable.
  2. Loans provided: If a business lends money to another entity, such as a supplier, partner, or employee, the amount lent becomes a receivable until it is repaid. The loan agreement usually outlines the repayment terms, interest rate, and schedule.
  3. Rent receivables: If a company owns rental property and leases it to tenants, the outstanding rent owed by the tenants is considered a receivable. This can include both residential and commercial rental properties.
  4. Interest income: If a company has made an interest-bearing investment, such as a bond or a deposit, the interest income that has been earned but not yet received is considered a receivable.
  5. Insurance claims: When a business files an insurance claim for a covered loss, the claim’s unsettled portion is considered a receivable until the insurance company pays the claim.
  6. Tax refunds: If a company has overpaid its taxes and is expecting a refund from the tax authorities, the anticipated refund amount is considered a receivable.
  7. Legal settlements: If a company is awarded a settlement in a lawsuit or legal dispute, the unpaid portion of the settlement is considered a receivable.

These examples illustrate various types of receivables that can arise from different business activities. The common thread among them is that they represent amounts owed to the company that it expects to collect in the future.

Balance Sheet

Balance Sheet Jonathan Poland

The balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It shows the company’s assets, liabilities, and equity, and provides information about the company’s financial health and its ability to generate cash flow. The main elements of a balance sheet are assets, liabilities, and equity.

Assets are the resources owned by the company, such as cash, investments, property, and equipment. They represent the value of the things that the company owns and can use to generate income. Assets are important because they provide the company with the means to generate cash flow and meet its financial obligations.

Liabilities are the obligations of the company, such as debt, taxes, and other expenses. They represent the value of the things that the company owes to others, such as creditors or vendors. Liabilities are important because they represent the company’s obligations that must be paid out of its cash flow or assets.

Equity is the residual interest in the assets of the company, and represents the ownership of the company’s shareholders. It is the value of the company that remains after all of its liabilities have been paid off. Equity is important because it represents the value of the company that is owned by its shareholders, and it is the source of the company’s ability to generate cash flow and grow its business.

The balance sheet is structured in a way that reflects the fundamental accounting equation: Assets = Liabilities + Equity. This equation shows that the value of a company’s assets is equal to the sum of its liabilities and equity. The balance sheet is prepared using this equation as a starting point, and shows the values of the company’s assets, liabilities, and equity at a specific point in time.

Other elements of the balance sheet may include items such as retained earnings, common stock, and paid-in capital. These items provide additional information about the company’s financial position and are typically presented as separate line items on the balance sheet.

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