Accounting 101 by Michele Cagan

Author:Michele Cagan
Language: eng
Format: epub
Publisher: Adams Media

PLEASE PAY WITHIN 30 DAYS

Accounts receivable is often the largest current asset for service businesses, and among the largest for inventory-based businesses. This account describes itself perfectly: It’s the amount of money you expect to receive from customers who made purchases on account. That does not include credit card sales—those count as cash. Rather, accounts receivable comes into play when your company itself extends credit to customers.

For example, if you’re a freelance writer and you write an article for a client, then submit a bill to them, the amount due in that bill would be included in accounts receivable. The situation is similar for inventory-based businesses. Say your company makes custom standing desks for $500 each. A legal firm in town buys 10 desks, on account, for a total purchase of $5,000. Your company delivers the desks, and sends them an invoice. Your invoice would include the price of the desks ($5,000), plus sales tax (at 5 percent: $250), plus your $50 delivery fee. That inclusive invoice total of $5,300 ($5,000 + $250 + $50) would now be included in accounts receivable.

Managing your accounts receivable well can keep you in business; extending too much credit or letting customers slide can crush your company. No matter how much you want to make a sale, it’s important to make sure your customers are going to pay you. This can be easily resolved by having your customers fill out a credit application when you first start doing business with them. That can provide valuable clues into a customer’s payment history, and let you know how likely they are to pay you. In the meantime, for their first purchase, you can extend limited credit (as much as you could stomach losing) or require a large down payment.

The Trick to Getting Paid Early

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