Utah Contractor Practice Exam

What does "accounts receivable" best describe?

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

"Accounts receivable" best describes money due from customers who have purchased goods or services on credit because it represents a key aspect of a business's financial health and cash flow management. This account is considered an asset on the balance sheet because it reflects the amount of money that clients owe to the business for products or services that have already been delivered but not yet paid for. As customers are billed after receiving goods or services, accounts receivable plays a crucial role in understanding how much cash the business anticipates receiving in the near future, which can impact budgeting and financial planning. This concept is essential for contractors and other businesses that often operate on credit terms, providing an insight into expected revenue and the timelines for cash inflows. The other choices highlight different financial concepts—business costs are operational expenses or liabilities that do not pertain to the concept of accounts receivable, and liability accounts refer to what the business owes rather than what it is owed. Thus, focusing on the customer's debt is the core idea behind accounts receivable.