Introduction to Financial Accounting Solutions

During the course of regular business, it is not uncommon to provide credit to some customers. Once a business provides an extension of credit, it now owns a promise that it will be paid back. As part of this agreement, the business entity will charge interest at varying rates, which are typically imposed based on the credit worthiness of the customer. It is also not uncommon that the business will not be able to collect some of these credit extensions. In accounting, we identify these promises someone makes to a business entity as an accounts receivable. This section of the course will provide analysis and insight on accounts receivables and highlight specific information on what to do when a business extends credit to its customers.

Also, during the regular course of business, there may come times where the business entity needs to make specific purchases to support the regular business activity, but they do not have enough cash on hand to meet these demands from a current asset perspective. In these types of situations, it is viable for a business entity to possess lines of credit. In this type of situation, the business entity has created a promise to pay someone else as a result of being extended a particular line of credit or goods on credit. These types of transactions would be considered payables and would in fact create liabilities for the organization. Please remember that earlier in the course, you were introduced to the fact that a liability can also be considered a promise to pay.