What are accounts receivable?

The correct answer identifies accounts receivable as amounts owed to a business by customers for goods or services sold on credit. This concept is fundamental in accounting, as accounts receivable represent one of the key components of a company’s balance sheet and indicate future cash inflows. When a business sells a product or service and allows the customer to pay later, it records this transaction as accounts receivable. This not only reflects the company's revenue-generating activities but also highlights its relationship with customers who are purchasing on credit.

This classification as accounts receivable is vital for managing cash flow and financial planning, as the business expects to receive these funds in the future. The understanding of how accounts receivable works is crucial for evaluating a company's liquidity and overall financial health, making it an essential aspect of accounting.

The other options, while related to financial transactions, do not accurately define accounts receivable. For instance, amounts a business owes to suppliers refer to accounts payable, cash equivalents pertain to liquid assets readily available for use, and prepaid expenses are costs paid in advance for services or goods to be received in the future.