Accounts receivable

Accounts receivable is a legally enforceable claim for payment from a business to

its customer/clients for goods supplied and/or services rendered in execution of the
customer's order. These are generally in the form of invoices raised by a business
and delivered to the customer for payment within an agreed time frame. Accounts
receivable is shown in a balance sheet as an asset. It is one of a series of accounting
transactions dealing with the billing of a customer for goods and services that the
customer has ordered. These may be distinguished from notes receivable, which are
debts created through formal legal instruments called promissory notes.
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Contents
1 Overview
2 Payment terms
3 Accounts Receivable Age Analysis
4 Bookkeeping
5 Special uses
6 Related accounting topics
7 See also
8 Notes and references
Overview
Accounts receivable represents money owed by entities to the firm on the sale of
products or services on credit. In most business entities, accounts receivable is
typically executed by generating an invoice and either mailing or electronically
delivering it to the customer, who, in turn, must pay it within an established
timeframe, called credit terms
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or payment terms.
The accounts receivable department uses the sales ledger, because a sales ledger
normally records:
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The sales a business has made.
The amount of money received for goods or services.
The amount of money owed at the end of each month varies (debtors).
The accounts receivable team is in charge of receiving funds on behalf of a company
and applying it towards their current pending balances.
Collections and cashiering teams are part of the accounts receivable department.
While the collections department seeks the debtor, the cashiering team applies the
monies received.
Payment terms
An example of a common payment term is Net 30 days, which means that payment
is due at the end of 30 days from the date of invoice. The debtor is free to pay
before the due date; businesses can offer a discount for early payment. Other
common payment terms include Net 45, Net 60 and 30 days end of month. The
creditor may be able to charge late fees or interest if the amount is not paid by the
due date.
Booking a receivable is accomplished by a simple accounting transaction; however,
the process of maintaining and collecting payments on the accounts receivable
subsidiary account balances can be a full-time proposition. Depending on the
industry in practice, accounts receivable payments can be received up to 10 15
days after the due date has been reached. These types of payment practices are
sometimes developed by industry standards, corporate policy, or because of the
financial condition of the client.
Since not all customer debts will be collected, businesses typically estimate the
amount of and then record an allowance for doubtful accounts
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which appears on
the balance sheet as a contra account that offsets total accounts receivable. When
accounts receivable are not paid, some companies turn them over to third party
collection agencies or collection attorneys who will attempt to recover the debt via
negotiating payment plans, settlement offers or pursuing other legal action.
Outstanding advances are part of accounts receivable if a company gets an order
from its customers with payment terms agreed upon in advance. Since billing is done
to claim the advances several times, this area of collectible is not reflected in
accounts receivables. Ideally, since advance payment occurs within a mutually
agreed-upon term, it is the responsibility of the accounts department to periodically
take out the statement showing advance collectible and should be provided to sales
& marketing for collection of advances. The payment of accounts receivable can be
protected either by a letter of credit or by Trade Credit Insurance
Accounts Receivable Age Analysis
An Accounts Receivable Age Analysis, also known as the Debtors Book is divided in
categories for current, 30 days, 60 days, 90 days or longer. The analysis or report is
commonly known as an Aged Trial Balance. Customers are typically listed in
alphabetic order or by the amount outstanding, or according to the company chart of
accounts. Zero balances are not usually shown.
Bookkeeping
On a company's balance sheet, accounts receivable are the money owed to that
company by entities outside of the company. Account receivables are classified as
current assets assuming that they are due within one calendar year or fiscal year. To
record a journal entry for a sale on account, one must debit a receivable and credit a
revenue account. When the customer pays off their accounts, one debits cash and
credits the receivable in the journal entry. The ending balance on the trial balance
sheet for accounts receivable is usually a debit.
Business organizations which have become too large to perform such tasks by hand
(or small ones that could but prefer not to do them by hand) will generally use
accounting software on a computer to perform this task.
Companies have two methods available to them for measuring the net value of
accounts receivable, which is generally computed by subtracting the balance of an
allowance account from the accounts receivable account.
The first method is the allowance method, which establishes a contra-asset
account, allowance for doubtful accounts, or bad debt provision, that has the effect
of reducing the balance for accounts receivable. The amount of the bad debt
provision can be computed in two ways, either (1) by reviewing each individual debt
and deciding whether it is doubtful (a specific provision); or (2) by providing for a
fixed percentage (e.g. 2%) of total debtors (a general provision). The change in the
bad debt provision from year to year is posted to the bad debt expense account in
the income statement.
The second method is the direct write-off method. It is simpler than the allowance
method in that it allows for one simple entry to reduce accounts receivable to its net
realizable value. The entry would consist of debiting a bad debt expense account and
crediting the respective accounts receivable in the sales ledger.
The two methods are not mutually exclusive, and some businesses will have a
provision for doubtful debts, writing off specific debts that they know to be bad (for
example, if the debtor has gone into liquidation.)
Special uses
Companies can use their accounts receivable as collateral when obtaining a loan
(asset-based lending). They may also sell them through factoring or on an exchange.
Pools or portfolios of accounts receivable can be sold in capital markets through
securitization.
For tax reporting purposes, a general provision for bad debts is not an allowable
deduction from profit
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- a business can only get relief for specific debtors that have
gone bad. However, for financial reporting purposes, companies may choose to have
a general provision against bad debts consistent with their past experience of
customer payments, in order to avoid over-stating debtors in the balance sheet.