Do you have a good understanding of how accounts receivable affect a company’s finances? These items on the balance sheet can be either good or bad for a business. A thorough understanding of accounts receivable can aid in capitalizing on time-sensitive opportunities, cash flow management, and maintaining flexibility. So, let’s look at the fundamentals and specifics of accounts receivable.
Accounts receivable is the money owed to a company that is not yet paid for by its consumers. On the balance sheet, accounts receivable is listed as a current asset.
The longer the accounts receivable remain unpaid, the more difficult it will be to invest in manufacturing for the next order. Uncollected payments squander working capital and lengthen business cycles. So a business must make sure to collect all due accounts as quickly as possible. If it doesn’t, it will run out of funds for other things.
More About Accounts Receivables
Accounts receivables can be looked at as a company’s overdue bills receivable or the money owed by customers to the business. It simply means the amount that a firm is owed in return for a good or service. Accounts receivables can be looked at as a kind of loan that a firm gives to its customers. Generally, the payments are needed to be made within a certain decided period. It might be anything from a few days to a whole fiscal year.
Since the consumer has a legal obligation to pay the loan, companies report accounts receivable as current assets on their balance sheets. This means the debtor must pay the account balance within a year or less, as per the contract decided upon between the two parties. If a company has receivables, it shows that it has made a credit sale but hasn’t received payment for it yet.
Example Of Accounts Receivable
Traditional billing processes of utility firms are essential to understand accounts receivable instances. Consider an electricity company’s accounting processes through which customers are given these resources, and they are billed after they have used them. Unpaid invoices will be recorded in the accounts receivables area of the balance sheet as the companies await the payment for the services delivered.
Most businesses allow some part of their sales to be made on loans. Businesses may give this credit to regular or special customers who receive bills on a regular basis. Customers can avoid the trouble of physically making payments for each transaction by using this method. In other circumstances, businesses typically provide all of their customers with the option of paying after they have received the service.
This particular feature is also provided by Zomato. It has an “Order Now, Pay Later” feature that allows users to order their food, and pay their bills at a later date. These unpaid bills would be recorded by Zomato in its books of accounts as accounts receivable.
What Kind Of Account Does Accounts Receivable Come Under?
Now that the meaning of bills receivable is clear let us get to know which kind of account it is. The accounts receivable account is associated with the money owing to a company for goods and services rendered. An accountant or business owner records the accounts receivable as a “current asset” when doing a journal entry for accounts receivable. This indicates that the account balance will get paid in the coming year or less. This is a critical distinction in accounting, and if the accounts receivable isn’t paid within an accounting period, it will be recorded as a long-term asset on the balance sheet.
Example Of Journal Entry
| Date | Account Name | Debit | Credit |
| Feb 22 | Cash Cost of goods soldRevenueInventory | 500100 | 500100 |
Accounts Receivable vs. Accounts Payable
| Accounts Payable | Accounts Payable |
| The amount a business owes to a third party for some stock or services purchased on credit. | The money that a business has the legal authority to collect from customers for supplying goods or services on credit. |
| Accounts Payable is classified as a liability. | Accounts receivable are looked at as assets. |
So, we can say that accounts payable are the debts owed by a firm to any third parties. Accounts payable and receivable are the opposites of each other. Consider the following scenario where there are two companies, X and Y. So, X cleans Y’s carpets and submits a bill. Because Y owes them money, the invoice is entered into the accounts payable column. Because X is awaiting payment for services rendered, it enters the bill into its accounts receivable column.
Importance Of Accounts Receivable
The fundamental study of a company’s accounts receivable is very significant. So, let us have a look at some of the benefits of accounts receivable.
- As a current asset, accounts receivable measures a company’s liquidity or its capacity to meet short-term obligations without requiring extra financial flows.
Accounts receivable is frequently analyzed in the context of turnover, which is also referred to as the accounts receivable turnover ratio, which indicates the number of times a company has collected accounts receivable amount in a year. In other words, it measures the average receivables collection time for a business. Days sales outstanding study, for example, evaluates the average collection time frame for a company’s receivables balance over a given time.
The Right Way To Process Accounts Receivable
Accounts receivable processing is a simple procedure. Here is the right way to process them.
Step1: Create A Credit Approval Process
Make sure the company has a process for credit approval in place. When billing customers on credit, the business owner and the accountant must follow this procedure.
Step 2: Make Invoices For All The Customers
Invoicing is crucial, so make sure to generate an accounts receivable invoice for all the clients and customers right away. When a company sends an invoice to the customers as soon as possible, it helps to ensure that payment is received quickly.
Step 3: Keep Track Of The Accounts Receivable Balance
It’s critical to keep track of all the receivable balances. In this manner, one can make sure consumers are alerted of payment due dates as they approach and follow up on late payments.
Step 4: Post The Values
The posting of money received from clients in the books of accounts is the final stage in the accounts receivable process. The company will first record the transaction in its journal, transfer it to its ledger, and then use the net information to ascertain profit or loss at the end of the accounting period.
The Bottom Line
All in all, it can be said that accounts receivable is one of the most important terms in accounting. It plays a pivotal role in the handling of a business. In fact, it’s critical to handle the process correctly, including adequate client verification, credit terms that are appropriate for the company’s cash flow, and proactive collection of accounts receivable balance.