When debtors owe money to any company, it is called an accounts receivable. Normally, when the invoice gets generated, a sale gets realized. But, a certain time frame gets added to this for the customers to make the payment for the due amount. The practice of running a business on the given credit terms produces systems of Accounts Receivable in the financial statements.
This credit system has been introduced to make sure that there is smoothness in the working capital made into the companies. However, the process has complex mechanisms involved, for example, the management, period of credit, the process of making records of the financial statements and so on. In this article, the readers will get the basic knowledge related to Accounts Receivable.
The amount of payment which is not received is denoted by the term “receivable”. This means that the enterprise has made extensions in the credit facility for the customers.
After the business has dealt with the selling of services and goods on the credit, the right of the company to receive the amount of money after crossing a certain time period is basically called the accounts receivable. If the business provides some service to customer Z, the customer Z becomes liable to pay the its due money. This is an example of the system. Normally, the period of time kept for the credit transaction ranges from a month to maybe a full year.
Importance of Accounts Receivable
Accounts Receivable bears quite the importance for any business transactions.
- Usually, the company makes financial investments in providing a service or selling an item
- After making the sale of the products, the quantity of items is lowered in the inventory.
- This leads the business to invest in more items in order to attain a balance in the financial statements.
- The assets are normally either paid in cash or kept as receivable in cases of credits sales
- For this reason, the accounts receivable becomes visible in the section of asset within the sheet of balance.
- Because this system makes up huge portion of the asset of the organization, it leads generation of cash inflow within the accounting books of the company
- The goal on introducing this system of credit facility for the customers is to assist them and to ease the procedure of the transaction
- It also helps to establish a fruitful credit relation among the parties who are involved
- This system makes way for better deals
- It further helps to improve the management of the working capital
The Process of Recording the Accounts Receivable
Generally, all the finances are recommended to be recorded. Accordingly, if the company expects to get money in the future, it has to be added in the assets within the financial statements of the business. This system of keeping records of all the finances done for the company helps to avoid any fault related to the due payments and receivables.
The following topics are to be kept in mind while recording the accounts receivable.
Forming the Practice of Transacting Credits
The company should form a practice of transacting the credits to the customers. There is a scope of making extension of the time period to make the payment. Normally, any mistake related to this calls for a punishment. The foremost condition of the credit facility provision is that minimum two groups must come in terms with an agreement with the specified regulations for the transaction of credit. The one who provides this kind of assistance should inform beforehand his ability to make the payment before getting into the agreement in order to avoid the loss in the cash inflow.
Generation of the Customer Invoices
The companies must provide necessary invoices of all the sales done or services provided. The invoice must contain the details about the price of the products and the services delivered to the buyer. Generation of the Customer invoices make sure that the recording done for the transaction of credits are clear in the business accounts. Moreover, a copy made of the invoice is to be given to the buyer so that they can make the payment as per the rules of the agreement.
Keeping track of the received payments and the due payments
The job of the accountant is to keep track of all the payments that received or due from the buyers. The details should be have the following – method of the payment, date of the receiving of the payment and so on and these are to be kept in the ledger account of the customer. This helps to keep the records intact as well as the amount of credit. The enterprise must also generate duly reminders for the pending payments which are to be done by the customers.
Accounting done for the Accounts Receivable
The accountant, simply the person who is in charge of looking after the accounts receivables has to record all the necessary information related to the payments which are to be received, such as, due dates, amounts to be paid and so on. Keeping proper track of the accounts helps to receive the payments in due time from the customer. After receiving the payment and making the proper recording, the account of the given party gets settled for good.
Management related to the Accounts Receivable
Management related to the Accounts Receivable is the process which ensures that the customers make their payment in due time. It assists the companies from running out of properly working capital during any point of time. Moreover, it helps to prevent any overdue of payment of the amounts pending by the customers. It builds up the financial and position of liquidity for the companies. A good management of the accounts receivable helps to make contribution to the profitability of the company by diminishing the risk of any unfavorable debts.
Management is simply not only about making reminders to the customers and collection of payment on the due time. It also includes identifying the causes for the delays done during the payments and to find a solution for those issues.
Process involved in the Management
The process of involved in management of Accounts Receivable are as follows:
- A review of the credit rating or the payment making ability of the customer will be conducted before making any agreement with the terms and conditions
- A vigorous monitoring of the risk of non-payment or delayed payments has to be conducted
- Maintenance of the customer relations are to be done in order to minimize bad debts
- The complaints coming from the buyers are to be addressed properly
- After the receiving of the payments, the balances of the certain account has to be reduced
- Prevention of bad debts of the receivables outstanding has to done during a particular time frame.
These are all the details needed to be known about the Accounts Receivable process. For further details visit our website