True or false: Accounts receivable occur on credit sales and it is the average credit period. True false question. True False
The Correct Answer and Explanation is:
True
Accounts receivable refer to the amounts a business expects to receive from customers for goods or services provided on credit. Essentially, when a company makes a credit sale, it allows the customer to pay at a later date, and until the payment is received, the outstanding amount is recorded as an account receivable.
The average credit period, on the other hand, is the average time it takes for a company to collect its receivables. This period is typically measured in days and is calculated as:Average Credit Period=Accounts ReceivableTotal Credit Sales×365\text{Average Credit Period} = \frac{\text{Accounts Receivable}}{\text{Total Credit Sales}} \times 365Average Credit Period=Total Credit SalesAccounts Receivable×365
This formula helps businesses assess how efficiently they are collecting payments from customers. A longer average credit period could indicate potential liquidity issues or that the company is offering longer payment terms, whereas a shorter period may suggest better cash flow management.
When accounts receivable are reported in financial statements, they reflect amounts due from customers but are subject to the risk of bad debts, where some accounts might never be collected. Proper management of receivables, along with an efficient collection process, is crucial for maintaining healthy cash flow and reducing financial risk.
In summary, accounts receivable arise from credit sales, and the average credit period is an important metric that businesses use to assess the efficiency of their receivables management.
