What are account receivables?
The account receivables are also known as Trade Receivables. These are basically the amount of money which is allowed by a company to the customers so that they can purchase on credit. It is the money owned by the customers for the purpose of goods and services. A company has full right on the account receivables as it provides customers with good and/or services.
It can be understood from the example that if a company delivers a product to its customer, then if the customers do not pay instantly and instead take a period of approximately 30 to 60 days, in this case the company that sold the product to the customer in first place is the one who is owed the money by the customers. Here this amount of money which the customers owe to the company from which they bought the goods is known as the Account Receivables.
These account receivables are the current assets which are represented on the balance sheet of the company. For the proper accounting of goods, it is essential to estimate the amount which is yet to be collected. This amount which is estimated is basically a credit balance such as an allowance for doubtful accounts that is recorded in the income statement account.
How the account receivables can may becomes harmful to the business?
Now since the companies sell on credits, it is quite unlikely to have liens on the properties of the customers. This increases the risk of not being able to receive the full amount of account receivable. This may eventually lead to a decrease in the profits of that particular company. Thus in this way the account receivables can become harmful to the business.
Account receivables are an important factor in determining the working capital of a particular company. It should neither be too high or too low. If the account receivables are too high they may lead to the laxing of a company in terms of collection and if it is too low the company may unconsciously end up harming the customers relationship by not being able to offer competitive payment terms.
Thus the companies need to be careful and take cautious steps whenever they grant credits and establish an account receivable. And if there is some kind of uncertainty in the potential of a customer’s credit, then a company should be wise enough to take payments from the customers before making the delivery of the goods and services.
Along with that it is required that a company keeps a regular check on its account receivables and if they find that a certain payments has not been made or agreed by the customers they should make immediate follow up with regard to that particular customer.
Thus account receivables are those powerful tools which help in maintaining the company’s benefits and are readily available with many of the accounting softwares. But if they are not managed properly may end up harming your business.