What is Accounts Receivable? An Interesting Yet Difficult Concept in the World of Accounting and Finance
An accounts receivable is a term very commonly used in finance and accounting, that talks about revenue that has not yet been collected, also known as on collecting revenue. Accounts receivable is essentially something like this, I run to Pizza Shoppe, and I wholesale pizzas to foreign clients. I have a client who places an order once a month, that gives me between 30 and 90 days to repair the pizzas, the clients gives me $15,000 for 100 pizzas, I know it’s a high price for pizzas but I don’t feel like doing the math so pretend or luxury pizzas. I give the client 90 days to pay, and I give him the order now a and accounts receivable is a term very commonly used in finance and accounting, that talks about revenue that has not yet been collected, also known as on collected revenue. For more information on answer the question of “what is an accounts receivable” subscribe to our blog for daily post updates, or comment down below and we’ll respond ASAP.
What is Accounts Receivable? An Accounting Concept More Than a Finance One
Accounts receivable is essentially something like this, I run a pizza shop, and I wholesale pizzas to foreign clients. I have a client who places an order once a month, that gives me between 30 and 90 days to prepare the pizzas, the clients gives me $15,000 for 100 pizzas, I know it’s a high price for pizzas but I don’t feel like doing the math so pretend or luxury pizzas. I give the client 90 days to pay, and I give him the order now at a typical interest rate, even offering him discounts to pay for pay early. This is an Accounts Receivable, I’ve already delivered the pizzas, and I’ve already made money off of this, all I need to do, is collect the money now, this goes on my books as a revenue, and will be collected when it’s collected.
As far as the IRS and the taxman is concerned, I’ve made this revenue already, and need to pay taxes on it at the end of my quarterly filings, at the end of each fiscal period. In the accrual based method of accounting, which is where revenue is reported as it is ACCRUED, not collected as cash, which would be the cash based method of accounting, Accounts Receivable exists as a very common journal entry account, in the cash based method, it does not.
Why The Accounts Receivable T-Account Is Useful, Comparing the Accrual vs The Cash Method of Accounting
The accounts receivable T-Account in accounting, and the accrual based method of accounting as a whole, is the most useful way of accounting for a companies books, and tells the whole story better than the cash based method of accounting does. While sure, the cash based method is better if you’re doing something like filing a simple schedule C tax return with only $10,000 in revenue, the accrual method of accounting and its use is where things start to get more useful if you’re talking about a medium to large size corporation, with possibly millions or billions of dollars per year in annual revenue.
When you’re talking about hundreds upon hundreds of transactions every single week or even every single day (I ran a six figure online business for a little while and we’re talking I probably had 500+ transactions every single month, it was insane, between hosting fees, income from 6 different affiliate sources plus 1099 income and w-2 income, the people I was paying on 1099, the social media advertising fees, SEO fees, software expense fees, accounting fees, legal fees, tax software fees, Microsoft office software fees, car fees, rental space fees, business phone usage fees) it was absolutely insane, but a lot of fun at the same time. The accrual method, in a nutshell, is better over the long term because you can more accurately reflect on your financial statements and quarterly tax filings, exactly when revenue came in, via the accounts receivable journal entry account.
Final Thoughts on The Accounts Receivable T-Account, A powerful Normal Debit That is Frequently Spoken of In The World of Finance
In closing this blog post, I am starting to push my way towards a BA in Accounting to go along with my BA in Finance, and after that will hopefully go for the CPA exams in pursuit of a CPA license. While this is not the case just yet, I am a huge fan of Finance and Accounting, and am currently working in the sector of investment banking as a broker and associate, so if you have any general finance related questions about options trading, technical analysis, investing using 10-K reports, index fund investing, etc. I’d be happy to answer, just leave a comment down below. For more information, comment down below or subscribe to our blog for additional details and information.
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