What does accounts receivable represent?

Accounts receivable represents money owed to a company by customers for goods or services that have been delivered but not yet paid for. This financial metric is crucial for businesses as it indicates the amount of sales that have not yet been converted into cash. When a company sells products or services on credit, it records the amount expected to be received in the accounts receivable account. This facilitates tracking unpaid customer bills and managing cash flow, as the company anticipates receiving this money in the near future.

Understanding accounts receivable is essential for assessing a company's liquidity and overall financial health since it directly impacts cash flow. Effective management of accounts receivable can lead to more timely collection of payments, which is vital for sustaining operations and growth.