CSLB Contractor's Law & Business Practice Exam

What is the best description of "accounts receivable"?

1. Money due from customers who have purchased goods or services on credit

2. Business costs and expenses due and payable within the current accounting period

3. Accounts listed on the liability side of the balance sheet

4. Money owed to material suppliers for credit purchases

The correct answer is: Money due from customers who have purchased goods or services on credit

The best description of "accounts receivable" is that it refers to money due from customers who have purchased goods or services on credit. This concept is fundamental in accounting and reflects amounts owed to a business by its customers as a result of credit sales. When a business sells its products or services and allows customers to pay at a later date, those amounts become accounts receivable. This affects cash flow since the business has not yet received the payment, but it has recognized revenue for the sale. Effectively managing accounts receivable is crucial for a company's financial health, as it indicates the efficiency of a business in collecting payment for its sales. The other options pertain to different financial concepts. Business costs and expenses, for instance, relate to the expenditures a company incurs to operate and are not tied specifically to credit sales. Additionally, accounts listed on the liability side of the balance sheet represent obligations the company owes rather than amounts receivable from customers. Lastly, money owed to material suppliers for credit purchases pertains to accounts payable, which is a liability rather than an asset, making it distinct from accounts receivable.