Accounts receivable is an entry made in the books of accounts regarding the amount a business has credited to its customers on supplied goods and/or services.
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Accounts receivable is the amount which is owed to a business by its customers for the goods or services they have purchased on credit. This amount is incoming to a business for the goods and services it has delivered but whose payment is yet to be made by its customers.
Accounts receivable is considered as a short-term credit which is recorded under current assets of the business’ balance sheet as customers are legally obliged to pay their debt. The amount which is owed to the business is recorded in its general ledger as ‘Accounts Receivable’ or ‘Trade Receivable’.
Management of accounts receivable is essential to a business so as to ensure proper collection of dues from customers.
Organized management of accounts receivable requires estimating the amount of accounts receivable which is unlikely to be collected. This amount should be reported in a contra-receivable account ( generally known as provision for doubtful debts) as a credit balance which will reduce the reported amount of accounts receivable on the balance sheet.
Proper management of accounts receivable is important as it will keep track of the dues to be collected from the customers. It will ensure timely collection of dues and help in tracing the fraudulent customers who plan to avoid making the payment for the goods and services delivered by the business.
Management of accounts receivable also helps in carrying out an accurate fundamental analysis of the business. It helps to measure the liquidity of the business and determines its ability to fulfill short-term debts without requiring additional cash-flow.
Accounts receivable is also evaluated by fundamental analysts based on the turnover. It is known as the accounts receivable turnover ratio as it measures the number of times the business has collected its accounts receivable balance in an accounting period. Another analysis, known as days of sales outstanding analysis, measures the average period of collection of a business’ accounts receivable balance for a specific time period.
Thus, organized management of accounts receivable helps in ensuring the systematic functioning of a business, avoiding frauds and thefts, and enables better management of cash-flows which further improves the daily performance of a business.
The process of recording accounts receivable varies from business to business. The larger a business is the stricter its processes will be. However, a basic structure is followed by all businesses so as to record accounts receivable accurately.
Most businesses allow a part of their sales to be delivered on credit. If the customer is frequent or special to the business, supply on credit is made to them on a regular basis. This allows such customers to pay the dues as a bigger collective amount at once instead of making frequent payments in small amounts. At other times, businesses offer sales on credit to all their customers on a regular basis.
These credits are recorded as accounts receivables in their books and their payment date is tracked after properly verifying the invoice details. When the due date arrives, the payment is collected by businesses and the accounts receivable amount is subtracted from the total amount of the current assets.
Several automated accounting software applications are available which help in processing the accounts receivable for various businesses. These applications integrate with the ERP of the business and reduce human error, costs, and time while increasing the efficiency of management of its accounts receivable. Thus, it improves the daily performance of the business by reducing its expenditure and errors.