Accounts Receivable is the opposite side of the financial transaction from accounts payable (AP). While accounts payable represents the money a company owes to its suppliers and creditors, accounts receivable represents the money that is owed to the company by its customers or clients for goods or services provided.
When a business provides goods or services to a customer on credit, it typically generates an invoice detailing the amount due, payment terms, and due date.
Credit terms specify when payment is expected from customers. These terms can vary but often include "Net 30" or "Net 60," indicating that payment is due within 30 or 60 days from the invoice date, respectively.
Aging reports categorise outstanding invoices based on their age (e.g. current, 30 days overdue, 60days overdue). This helps businesses track overdue payments and take appropriate actions.
Accounts receivable departments or teams are responsible for collecting payments from customers.This may involve sending reminders, making collection calls, or initiating legal action in cases of non-payment.
Businesses need to evaluate the credit worthiness of their customers before extending credit. This involves assessing the customer's ability to pay and setting credit limits.
Companies often set aside a reserve for bad debts, anticipating that not all customers will pay in full. This reserve helps account for potential losses due to non-payment.
Accounts receivable management is crucial for maintaining healthy cash flow. Aged receivables can tie up capital, so prompt collection is essential.
Regular reconciliation of accounts receivable records with customer payments ensures accuracy in financial reporting.
Companies send periodic statements to customers summarising their outstanding balances, recent transactions, and payment history.
If a company offers early payment discounts to customers, it needs to account for these discounts when recording revenue.
Some businesses may choose to sell their accounts receivable to a third-party financial institution (a process known as factoring) to obtain immediate cash flow and transfer the credit risk.
An aging schedule is a report that breaks down accounts receivable balances by the number of days they are overdue. This helps identify and prioritise collections efforts.
Effective management of accounts receivable is essential for maintaining liquidity and ensuring that a business can meet its financial obligations. It involves a balance between providing credit to customers to stimulate sales and collecting payments promptly to minimise the risk of bad debts. Companies often use accounting software and financial systems to streamline their accounts receivable processes and improve efficiency.
