How is accounts receivable defined?

Accounts receivable is defined as the money owed to a business by its customers for goods or services sold on credit. This concept is crucial for understanding a company's cash flow and financial health. When a business makes a sale on credit, it does not receive payment immediately; instead, it records this as an account receivable until the customer pays the invoice. This represents a claim for payment from customers and is considered a current asset on the balance sheet, as it is expected to be received within a year.

Understanding accounts receivable is essential for managing cash flow effectively, as a large accounts receivable balance may indicate that a business is waiting on significant payments, which can affect liquidity. In contrast, the other choices pertain to different financial concepts. For instance, the funds paid to suppliers relate to accounts payable, while cash reserves are concerned with liquidity management, and total revenue reflects overall business earnings rather than specific outstanding payments. Thus, focusing on the precise definition of accounts receivable highlights its role as a key component in managing a small business's finances.