What does accounts receivable mean?

Accounts receivable refers to the money that is owed to a company by its customers for goods or services that have been delivered or used but not yet paid for. This concept is crucial in accounting and finance because it represents a legal obligation for customers to settle their debts, and it accounts for a significant portion of a company's assets.

When a business sells products or services on credit, it creates accounts receivable. This means that the company provides goods or services upfront and expects to receive payment at a later date. This is an essential mechanism for managing cash flow and financing operations without requiring immediate payment at the point of sale.

The other choices describe different financial concepts. Money owed by suppliers refers to accounts payable, which is not the context of accounts receivable. Money set aside for expenses represents reserve funds, while money that is invested for future profits pertains to investment strategies, neither of which directly relates to accounts receivable. Understanding accounts receivable is vital as it plays a key role in assessing a company’s revenue and its overall financial health.