The sale is considered to have been made when the invoice is generated. However, customers are usually given a time frame for payment. The practice of doing business on credit terms gives rise to Accounts Receivable (AR), in the financial statements.
This credit facility was created to facilitate the smooth flow of working capital into businesses. There is an account receivable process, such as its management, recording in financial statements, credit period, and so on.
What is Accounts Receivable?
Receivable is the amount of unpaid money. This is when the company extends credit facilities to its customers. After some time, a business can receive accounts receivable money. This is money the business is entitled to after it has sold goods and services on credit.
The accounts receivable, for example, is a record of fact that a company did work for customer X. This customer X owes the company money. The credit period can be anywhere from one month to one year.
Why are Accounts receivable so important?
Businesses often invest money in selling products or delivering services. Once the goods are sold, inventories decrease, and businesses require an asset to balance their financial statements. Assets can be cash-in-hand or receivables for credit sales. That’s why accounts receivable are listed on the balance sheet. It is a significant part of an organization’s asset and leads to cash flow in the books.
Credit facilities are provided to customers to help facilitate the transaction and to establish strong credit relations between the parties. This may result in better deals and improve the management of working capital.
How are Accounts receivables recorded in financial statements?
Businesses expect to receive money in the future. Therefore, it should be added to their assets in their financial statements. To avoid defaults in payment, it is important to keep accurate records of money receivable (accounts due) in your books of accounts.
These are a few tips to help you record receivables.
Establishing credit transactions
A credit policy may be established by the business to provide credit policies to buyers. The credit can be extended for a specific time and defaults in payments usually result in a penalty. A credit facility is a practice that requires two parties to reach an agreement about the terms and conditions of credit transactions.
To prevent cash flow loss, the provider of this facility must verify the customer’s ability to pay.
Invoice generation for customers
Invoices must be generated by businesses for any sales or services rendered. Invoices should include details about the price of the goods or services that were sold to customers. The invoice is generated to ensure that the credit transaction is recorded in the business’ accounts. A copy of the invoice will be provided to the customer for payment according to the terms.
You can track the payments that have been received and the one that is due.
To track payments received from customers, an accountant is necessary. In the customer’s ledger account, the details of the payment method and the date of receipt must be noted. This will ensure that the credit amount is accurately accounted for. Businesses will also send timely reminders to customers for owing amounts.
Accounting for accounts receivable
All due dates for payments must be recorded by the accountant or other person who is responsible for accounting. Receiving payments from customers on time is possible by recording the accounts receivable promptly. After the account receivable has been recorded and payment received, the account can be settled.
What is Accounts receivable Management?
The process of making sure customers pay their bills on time is known as accounts receivable management. It prevents businesses from running out on working capital. It prevents customers from overdue payments or non-payments of pending amounts. It improves the business’ financial and liquidity position.
Good receivable management can increase profitability and reduce the risk of bad debts. Management does not just involve reminding customers and collecting money on time. Management involves identifying the causes of delays and finding a solution.
What is the process of managing accounts receivables?
The following are the steps involved in managing an account receivable:
● Before agreeing to any terms or conditions, the credit rating (i.e. the ability to pay customers) shall be checked
● Monitor any possibility of non-payment, or delay in receiving payments.
● Customers should maintain good relations to reduce bad debts
● Resolving customer complaints
● The balances of the account receivable should decrease after receiving the payments.
● Avoidance of bad debts on receivables that remain unpaid for a specific period.