In a business, a sale is realized when its invoice is generated. However, sometimes, a period is provided to the prospects for the payment of the amount due. This is what conducting business on credit terms translates to and gives rise to Accounts Receivable (AR) in the financial statements of the business.
Being a vital factor for a smooth flow of the working capital into the businesses, its various complexities such as management, the process of recording in financial statements, and credit period must be properly looked into.
Continue reading this article to know more about the term and its management.
What is Accounts Receivable?
The accounts receivable is the balance of money due to your firm for goods or services delivered or used but not yet paid for by your patrons. In simple words, it’s the amount of payment not received by your business.
Consider this example.
You have done some work for customer X and that customer X owes money to your company to be paid inside a defined credit period. Generally, the credit period is short ranging from a month or two to a year.
The main idea behind providing a credit facility to your customers is to enable the ease of transaction and establish a strong credit relationship between both parties involved.
How is accounts receivable recorded in the financial statements?
Note that an accurate record keeping of the money that is receivable (accounts receivable) in your books of accounts is required to avoid any default in the payment due. The following are a few pointers connected to recording accounts receivable in the financial statements.
Establish the practice of credit transactions
You can establish a practice of providing a credit policy to your customers. This credit can be extended for a specified period. However, it’s worth noting that any default in this payment usually attracts a penalty.
Additionally, both you & your customers must agree on the terms and conditions for such credit transactions. For your business to avoid any loss in cash inflow, you must verify the paying ability of the customer before agreeing to any terms and conditions.
Generate invoices for your customer
You must generate invoices for any sales made or services delivered to the customer. In the invoice, make sure to include the details such as the cost of goods and services sold to the customer.
The main aim behind generating an invoice is that it ensures a clear recording of the credit transaction in the accounts of your business. Further, a copy of the invoice must be given to the customer to make the payment as per the agreed terms or credit policy.
Track the payments received and due to be received
If you’re an accountant, you must promptly track the payments received or due from the customers. Make sure to record the details of the method of payment and the date of receiving payment in the customer’s ledger account.
By doing so, you achieve correctness of accounting of the credit amount. Furthermore, the businesses shall also generate timely reminders for dues pending to the customers.
Account for the accounts receivable
Being an accountant, you must record all the due dates of the payments to be received as it leads to receiving the payments on time from the customers. Once the account receivable is recorded and payment is received, the account for the said party can be settled for good.
What is the process of accounts receivable management?
An account receivable management process involves:
- Reviewing the paying ability of the customers before agreeing to any terms and conditions
- Promptly monitoring the risk of non-payment or delay in receiving the payments by the customers
- Keeping strong customer relations intact
- Addressing the complaints of the customers
- Upon receiving the due payment, reducing the balances in the particular AR, and
- Preventing any bad debts of the receivables outstanding during a particular period
Accounts receivable management is the process of ensuring that your customers pay their active dues on time. This process helps the businesses from running out of working capital at any point in time due to any delay in the payment of the dues.
For any business, monitoring accounts receivable is an ideal way to control the outstanding payments from its customers. To do so, stick to the above-mentioned AR management process to prevent your business from running out of working capital at any point in time.
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