AR Accounts Receivable

7/28/2019 AR Accounts Receivable

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Accounts receivableAccounts receivable also known as Debtors, is money owed to a business by its clients (customers)and shown on its Balance Sheet as an asset.[1] It is one of a series of accounting transactions dealingwith the billing of a customer for goods and services that the customer has ordered.

Overview

Accounts receivable represents money owed by entities to the firm on the sale of products or serviceson credit. In most business entities, accounts receivable is typically executed by generating an invoiceand either mailing or electronicallydelivering it to the customer, who, in turn, must pay it within anestablished timeframe, called credit terms orpayment terms.

The accounts receivable departments use the sales ledger, this is because a sales ledger normallyrecords [2]:- The sales a business has made.

- The amount of money received for goods or services.- The amount of money owed at the end of each month varies (debtors).

The accounts receivable team is in charge of receiving funds on behalf of a company and applying ittowards their current pending balances.Collections and cashiering teams are part of the accounts receivable department. While the collection'sdepartment seeks the debtor, the cashiering team applies the monies received.

[edit] Payment terms

An example of a common payment term is Net 30, which means that payment is due at the end of 30

days from the date of invoice. Thedebtor is free to pay before the due date; businesses entities canoffer a discount for early payment. Other common payment terms includeNet 45,Net 60 and 30 daysend of month.

Booking a receivable is accomplished by a simple accounting transaction; however, the process ofmaintaining and collecting payments on the accounts receivable subsidiary account balances can be afull-time proposition. Depending on the industry in practice, accounts receivable payments can bereceived up to 10 15 days after the due date has been reached. These types of payment practices aresometimes developed by industry standards, corporate policy, or because of the financial condition ofthe client.

Since not all customer debts will be collected, businesses typically estimate the amount of and then

record an allowance for doubtful accounts[3] which appears on the balance sheet as a contra accountthat offsets total accounts receivable. When accounts receivable are not paid, some companies turnthem over to third party collection agenciesor collection attorneys who will attempt to recover the debtvia negotiating payment plans, settlement offers or pursuing other legal action.

Outstanding advances are part of accounts receivable if a company gets an order from its customerswith payment terms agreed upon in advance. Since billing is done to claim the advances several times,this area of collectible is not reflected in accounts receivables. Ideally, since advance payment occurswithin a mutually agreed-upon term, it is the responsibility of the accounts department to periodicallytake out the statement showing advance collectible and should be provided to sales & marketing for
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collection of advances. The payment of accounts receivable can be protected either by a letter of creditor by Trade Credit Insurance.

[edit] Accounts Receivable Age Analysis

The Accounts Receivable Age Analysis Printout , also known as the Debtors Book is divided in

categories for current , 30 days , 60 days , 90 days , 120 days , 150 days and 180 days and over due thatare produced in Modern Accounting Systems. The printout is done in the order of the Chart ofAccounts for the Accounts Receivable and/or Debtors Book. The option to include Zero Balancesoutstanding or to specifically leave it out is also possible in the printout features.

[edit] Bookkeeping

On a company'sbalance sheet, accounts receivable is the money owed to that company by entitiesoutside of the company. The receivables owed by the company's customers are called trade receivables.Account receivables are classified as current assetsassuming that they are due within one year. Torecord a journal entry for a sale on account, one must debita receivable and credit a revenue account.

When the customer pays off their accounts, one debits cash and credits the receivable in the journalentry. The ending balance on the trial balance sheet for accounts receivable is usually a debit.

Business organizations which have become too large to perform such tasks by hand (or small ones thatcould but prefer not to do them by hand) will generally use accounting software on a computertoperform this task.

Companies have two methods available to them for measuring the net value of accounts receivable,which is generally computed by subtracting the balance of an allowance account from the accountsreceivable account.

The first method is the allowance method, which establishes a contra-asset account, allowance fordoubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts

receivable. The amount of the bad debt provision can be computed in two ways, either (1) by reviewingeach individual debt and deciding whether it is doubtful (a specific provision); or (2) by providing for afixed percentage (e.g. 2%) of total debtors (a general provision). The change in the bad debt provisionfrom year to year is posted to the bad debt expense account in the income statement.

The second method is the direct write-off method. It is simpler than the allowance method in that itallows for one simple entry to reduce accounts receivable to its net realizable value. The entry wouldconsist of debiting a bad debt expense account and crediting the respective accounts receivable in thesales ledger.

The two methods are not mutually exclusive, and some businesses will have a provision for doubtfuldebts, writing off specific debts that they know to be bad (for example, if the debtor has gone into

liquidation.)

[edit] Special uses

Companies can use their accounts receivable ascollateralwhen obtaining a loan (asset-based lending).They may also sell them through factoring or on an exchange. Pools or portfolios of accountsreceivable can be sold in capital marketsthroughsecuritization.

For tax reporting purposes, a general provision for bad debts is not an allowable deduction from
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profit[4] - a business can only get relief for specific debtors that have gone bad. However, for financialreporting purposes, companies may choose to have a general provision against bad debts consistentwith their past experience of customer payments, in order to avoid over-stating debtors in the balancesheet.

[edit] Related accounting topics

Associated accounting issues include recognizing accounts receivable, valuing accounts receivable, anddisposing of accounts receivable.

In the UK, accounts receivable is more commonly known as Credit Control, and most companies havea credit control department.

Other types of accounting transactionsincludeaccounts payable, payroll, and trial balance.
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AR Accounts Receivable