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What are Accounts Receivable? Need of it in Company?

what are accounts receivables

We are unable to recover our money from Dhanraj Brothers now this will increase the number in the accounts receivable. If they are failed to pay us this year then they will be termed as Bad Debtors. 

Hope you got some idea about accounts receivable meaning. 

So those friends who borrow money from you and never returned it back, are Bad debtors. 

Accounts receivable are related to any money owed to a company for goods or securities it has sold or for services it has provided. In examining a company’s liquidity, it is a crucial factor. 

Is accounts receivable an asset? Yes, It is an asset and you can see accounts receivable in balance sheet. Since the company has done sales but didn’t get the money at that time, Company will get money in the future, which results in a strong cash position. Therefore accounts receivable is treated as a current asset(as the company is going to collect money in the short term). 

Capturing accounts receivable in the books.

Accounts receivable, which is located directly opposite Accounts Payable, is a current asset, thus it has a debit balance. As a result, following more transactions, the debit entry decreases the accounts receivables and the credit entry increases the accounts receivables.

Let’s say there are two people Ram and Shayam. Mr. Ram sold goods to Mr. Shayam worth Rs. 100(Using small figures so you can understand better) on a credit basis so accounts receivables of Mr. Ram are equal to accounts payable of Mr. Shayam. 

Now Mr. Shayam has given Rs.50 to Mr. Ram. Now Mr. Ram has Rs.50 in cash. So Account receivables of Mr. Ram will decrease because cash has been debited. so Debit entry will decrease the cash. 

Why do companies need an accounts receivables management?

Yes, there is a need for accounts receivables management in the company because of its benefits. By doing, companies are making sure that other companies are inclined towards them which directly leads to an increase in sales figures. Companies also came to know about the credit capacity of their customers and after that, they can decide whether they should do business with them or not. They can also identify bad debtors

Account receivables for Investors

Let’s look from the lens of an investor. Suppose there are two companies D Ltd. and B Ltd. The balance sheet of D Ltd. shows that it has account receivables of 20 crores. and the balance sheet of B Ltd. shows that it has account payables of 700 crores. 

What do you think? Which company is performing better?

Yes! D Ltd. is performing better than B Ltd.

So D Ltd is for DMART(Avenue Supermart Ltd.) and B Ltd. is for FRETAIL (Big Bazar).

still do not believe it. 

You can also google “dmart share price” and “fretail share price”.

There is a minor difference between Trade receivable and accounts receivable, Trade receivable is a subset of Accounts receivable. Trade receivable includes only those which consists of Inventories, Goods from supplier, and Accounts receivable consists of all monetary items that may be service or product. 

accounts receivables vs payable

there is a vice-versa or inversed relation between them which briefs the topic of accounts receivables vs payable. Accounts payable represent the sums owing by a company to its suppliers, whereas accounts receivable represents the sums owed to a firm by its customers. On the balance sheet of the business, accounts receivable are shown as an asset, and accounts payable are shown as a liability. Given that most of its costs are related to compensation, a services firm often has a greater ratio of receivables than payables. Because a retail firm buys its primary input from suppliers, its share of payables tends to be larger 

Final Words

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as the coin has two sides just like accounts receivables have two sides one tells about its pros and another tells about its cons. Credit is typically given to increase sales or in response to credit being given by rival businesses. Giving clients additional credit can enlarge a company’s pool of potential customers and boost its market share. This is a particularly effective strategy when a rival decides to lower the amount of credit supplied, putting a company offering more credit in an excellent position to recruit them. whereas A company’s bad debts may rise if the credit available to clients is increased. This is particularly possible if a business maintains a lax lending policy during a recession when customers can find it difficult to pay their debts. Additionally, having more receivables raises a company’s need for working capital, which can need to get more money to keep it afloat.

We hope We gave you some insights about accounts receivables and delivered it in the best possible way and cleared through the meaning of accounts receivable meaning.

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To your Investing Journey


Rupay Rajat
Rupay Rajat

Rupay Rajat is a financial and investing blog. I write about financial instruments and the stock market in the most easiest language.