What is Accounts Receivables?

The businesses often provide products or services to a regular or special customer on credit and expect to be paid later. This amount or the balance, yet to receive, is termed as the accounts receivable for the business.

Account receivables are outstanding invoices for the business for the duration of the credit period. The amount owed by the customer is termed as accounts payable.

The accountants consider accounts receivables as assets of the business and accounts payable as liabilities. It depicts the cash flow of the entities. A business owner must track both in order to completely understand the flow of money in the organization.

 

Terms of Payment for Accounts Receivable

Usually, the businesses mention their payment terms on their invoices. These are the conditions a business expects their customers to fulfill to complete a sale. These terms elaborate on payment details like:

  • Period for the payment
  • Conditions for the payment
  • Discounts to customer

Depending on the payment terms, a customer may have a due period of 30, 40, or 60 days. The payment terms may also mention the discounts to the customers if they are ready to pay before the due date. It also mentions the late fees for missing the due date.

Do remember that accounts receivable is a credit extended to the customers by the business. The due period may extend from a few days to a fiscal year. Businesses need certain fiscal & financial policies to maintain & collect receivables.

Accounts receivables are recorded as the current assets on the business’ balance sheet. It is expected of the customer to pay the due amount in a year or less. If the customer fails to do so within a year, the amount is recorded as the long-term asset in the balance sheet.

The accountants using the accrual basis of accounting, make an allowance for doubtful accounts. Some receivables are never collected. The allowance gives the business owners an estimate of the total bad debts related to the receivables. They, then, can use third-party firms to negotiate various payment plans, offers of settlement, or legal actions.

Accounts receivable age analysis or accounts receivable aging report helps the owners in getting a firm grasp on their receivables and avoid bad debts. It gives them a list of unpaid invoices divided using date ranges into current, 30 days, 60 days, 90 days, or longer. Aged trial balance, thus prepared, is the primary tool for collections personnel to zero-in on overdue invoices.

 

Streamlining Accounts Receivables

Generally, businesses need to be careful with four ingredients of the accounts receivable process: account setup, recording transactions, cash processing, and credit management. It is essential to streamline the process.

Account Setup: To start with, the businesses take into consideration the outcomes of the credit decisions before setting up the accounts receivables. The account setup comes clean on clients, implementation, financial charges, the processes involved, and the default codes for each process level. This streamlines the processing of payments and maintenance of customer balances and reporting.

Creation of Transaction: The business clarifies the preparation of invoices, debit and credit memos, etc. After successfully preparing invoices and typecasting the transactions, the steps are taken to streamlining the maintenance of the existing invoices.

Processing of Cash: During the cash processing stage, the details of the cash payments are mapped to the related transactions. The mapping is done manually or using the latest accounting software. The next step is to generate bills of exchange, which are then stored in the database.

Management of Credit: Here, the customer balance sheets and aging reports are reviewed. At this stage, the transactions are tracked and analyzed, and the reports are generated for a specific period of time. These are reviewed by the concerned department.

After all, selling products and services on credit means delayed payments. It is why businesses need to continuously monitor the cash flow statements to ensure a steady inflow of finances. They can ensure this by keeping the accounts payable cycle shorter than the accounts receivables cycle.