Accounts receivable is a legally enforceable claim for payment from a business to its customers for goods they have purchased or services requested. These are normally in the form of invoices raised by a business and delivered to the customer for payment within an approximate time frame. Accounts receivable is shown in a balance sheet as an asset.
Explanation of accounts receivable:
Accounts receivable represents money that is owned by entities to the firm which sold them the products or rendered services on credit. In most of the businesses, accounts receivable is typically used by generating an invoice. The invoices are then mailed or electronically sent to the customer. The customer then must pay his or her account within the established time frame which is called the credit terms or payment terms.
The accounts receivable department uses the sales ledger because the ledger normally records:
- The sales the business has made.
- The amount of money received for goods or services.
- The amount of money owed at the end of each month.
The most common payment term is “Net 30 days”, which mean that the debtor must pay 30 days after the invoice was created. Usually a business will offer a discount for early payment. Other common payment terms include Net 45, Net 60 and 30 days end of month. The creditor may charge late fees or interest if the amount is not paid by the due date.
Booking a receivable is done by a simple accounting transaction. The process of maintaining and collecting payments on the accounts receivable subsidiary account balances can be a full-time proposition. Accounts receivable payments can be receives up to 10 to 15 days after the due date has been reached, depending on the industry.
Since not all customer debts will be collected, businesses typically estimate the amount of and then record an allowance for doubtful accounts. These appear on the balance sheet as a contra account that offsets total accounts receivable. When accounts receivable are not paid, some companies turn them over to third-party collection agencies or debt collectors. They will attempt to recover the debt by negotiating payment plans, settlement offers or pursuing other legal action.
Outstanding advances form part of accounts receivable if a company gets an order from its customers with payment terms agreed upon in advance. Since the billling is done to claim the advances several times, this areaof collecible is not reflected in accounts receivables. Due to the fact that payment is received in advance, it is the account department’s responsibility to periodically take out the statement showing advance collectible and should be provided to sales and marketing for collection of advances. The payment of accounts receivable can be protected either by a letter of credit or by trade credit insurance.