Accounts receivable
Encyclopedia
Accounts receivable also known as Debtors, is money owed to a business by its clients (customers) and shown on its Balance Sheet as an asset. It is one of a series of accounting transactions dealing with the billing of a customer
for goods and services that the customer has ordered.
and either mailing or electronically
delivering it to the customer, who, in turn, must pay it within an established timeframe, called credit terms or payment terms.
The accounts receivable departments use the sales ledger, this is because a sales ledger normally records :
- 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 it towards their current pending balances.
Collections and cashiering teams are part of the accounts receivable department. While the collection's department seeks the debtor, the cashiering team applies the monies received.
, which means that payment is due at the end of 30 days from the date of invoice. The debtor
is free to pay before the due date; businesses entities can offer a discount for early payment. Other common payment terms include Net 45, Net 60 and 30 days end of month.
Booking a receivable is accomplished by a simple accounting transaction; however, the process of maintaining and collecting payments on the accounts receivable subsidiary account balances can be a full-time proposition. Depending on the industry in practice, accounts receivable payments can be received up to 10 – 15 days after the due date has been reached. These types of payment practices are sometimes developed by industry standards, corporate policy, or because of the financial condition of the client.
Since not all customer debts will be collected, businesses typically estimate the amount of and then record an allowance for doubtful accounts which appears 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 collection attorneys
who will attempt to recover the debt via 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 customers with 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 occurs within a mutually agreed-upon term, it is the responsibility of the accounts department to periodically take out the statement showing advance collectible and should be provided to sales & marketing for collection of advances. The payment of accounts receivable can be protected either by a letter of credit
or by Trade Credit Insurance
.
current , 30 days , 60 days , 90 days , 120 days , 150 days and 180 days and over due
that are produced in Modern Accounting Systems.
The printout is done in the order of the Chart of Accounts for the Accounts Receivable and/or
Debtors Book.
The option to include Zero Balances outstanding or to specifically leave it out is also possible in the printout features.
, accounts receivable is the money owed to that company by entities outside of the company. The receivables owed by the company's customers are called trade receivables. Account receivables are classified as current asset
s assuming that they are due within one year. To record a journal entry for a sale on account, one must debit
a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. 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 that could but prefer not to do them by hand) will generally use accounting software
on a computer
to perform 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 accounts receivable account.
The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful 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 reviewing each individual debt and deciding whether it is doubtful (a specific provision); or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision). The change in the bad debt provision from 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 it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.
The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into liquidation
.)
when obtaining a loan
(asset-based lending
). They may also sell them through factoring
or on an exchange
. Pools or portfolios of accounts receivable can be sold in capital markets through securitization
.
For tax reporting purposes, a general provision for bad debts is not an allowable deduction from profit - a business can only get relief for specific debtors that have gone bad. However, for financial reporting purposes, companies may choose to have a general provision against bad debts consistent with their past experience of customer payments, in order to avoid over-stating debtors in the balance sheet
.
In the UK
, accounts receivable is more commonly known as Credit Control, and most companies have a credit control department.
Other types of accounting transactions
include accounts payable
, payroll
, and trial balance
.
Customer
A customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
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 services on credit. In most business entities, accounts receivable is typically executed by generating an invoiceInvoice
An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms...
and either mailing or electronically
Electronic billing
Electronic billing is the electronic delivery of invoices and related information by a company to its customers. Electronic billing is referred to by a variety of terms,including the following:*Electronic bill payment...
delivering it to the customer, who, in turn, must pay it within an established timeframe, called credit terms or payment terms.
The accounts receivable departments use the sales ledger, this is because a sales ledger normally records :
- 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 it towards their current pending balances.
Collections and cashiering teams are part of the accounts receivable department. While the collection's department seeks the debtor, the cashiering team applies the monies received.
Payment terms
An example of a common payment term is Net 30Net 30
Net 30 is a form of trade credit which specifies that the net amount is expected to be payment received in full 30 days after the goods are dispatched by the seller, or 30 days after the service is completed. Net 30 terms are often coupled with a credit for early payment; e.g...
, which means that payment is due at the end of 30 days from the date of invoice. The debtor
Debtor
A debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor...
is free to pay before the due date; businesses entities can offer a discount for early payment. Other common payment terms include Net 45, Net 60 and 30 days end of month.
Booking a receivable is accomplished by a simple accounting transaction; however, the process of maintaining and collecting payments on the accounts receivable subsidiary account balances can be a full-time proposition. Depending on the industry in practice, accounts receivable payments can be received up to 10 – 15 days after the due date has been reached. These types of payment practices are sometimes developed by industry standards, corporate policy, or because of the financial condition of the client.
Since not all customer debts will be collected, businesses typically estimate the amount of and then record an allowance for doubtful accounts which appears 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
Collection agency
A collection agency is a business that pursues payments of debts owed by individuals or businesses. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed....
or collection attorneys
Creditor's rights
Creditor's rights is a legal term used to describe the set of procedural provisions designed to protect the ability of creditors - persons who are owed money - to collect the money that they are owed...
who will attempt to recover the debt via 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 customers with 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 occurs within a mutually agreed-upon term, it is the responsibility of the accounts department to periodically take out the statement showing advance collectible and should be provided to sales & marketing for collection of advances. The payment of accounts receivable can be protected either by a letter of credit
Letter of credit
A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking....
or by Trade Credit Insurance
Trade Credit Insurance
Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their balance sheet asset,...
.
Accounts Receivable Age Analysis
The Accounts Receivable Age Analysis Printout , also known as the Debtors Book is divided in categories forcurrent , 30 days , 60 days , 90 days , 120 days , 150 days and 180 days and over due
that are produced in Modern Accounting Systems.
The printout is done in the order of the Chart of Accounts for the Accounts Receivable and/or
Debtors Book.
The option to include Zero Balances outstanding or to specifically leave it out is also possible in the printout features.
Bookkeeping
On a company's balance sheetBalance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
, accounts receivable is the money owed to that company by entities outside of the company. The receivables owed by the company's customers are called trade receivables. Account receivables are classified as current asset
Current asset
In accounting, a current asset is an asset on the balance sheet which can either be converted to cash or used to pay current liabilities within 12 months...
s assuming that they are due within one year. To record a journal entry for a sale on account, one must debit
Debit
Debit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction and vice versa.Debits and credits are a system of notation...
a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the trial balance
Trial balance
A trial balance is a list of all the nominal ledger accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value...
sheet for accounts receivable is usually a debit.
Business organizations which have become too large to perform such tasks by hand (or small ones that could but prefer not to do them by hand) will generally use accounting software
Accounting software
Accounting software is application software that records and processes accounting transactions within functional modules such as accounts payable, accounts receivable, payroll, and trial balance. It functions as an accounting information system...
on a computer
Computer
A computer is a programmable machine designed to sequentially and automatically carry out a sequence of arithmetic or logical operations. The particular sequence of operations can be changed readily, allowing the computer to solve more than one kind of problem...
to perform 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 accounts receivable account.
The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable. The amount of the bad debt
Bad debt
A bad debt is an amount that is written off by the business as a loss to the business and classified as an expense because the debt owed to the business is unable to be collected, and all reasonable efforts have been exhausted to collect the amount owed...
provision can be computed in two ways, either (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision); or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision). The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
.
The second method is the direct write-off method. It is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.
The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into liquidation
Liquidation
In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
.)
Special uses
Companies can use their accounts receivable as collateralCollateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
when obtaining a loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
(asset-based lending
Asset-based lending
In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken. In this sense, a mortgage is an example of an asset-backed loan. More commonly however, the phrase is used to describe lending to business and large...
). They may also sell them through factoring
Factoring (finance)
Factoring is a financial transaction whereby a business job sells its accounts receivable to a third party at a discount...
or on an exchange
Exchange
-Finance and Commerce:* Exchange of goods and services, or trade* Exchange between a buyer and seller, a financial transaction* Exchange , where securities are sold and bought-Communications and Technology:...
. Pools or portfolios of accounts receivable can be sold in capital markets through securitization
Securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
.
For tax reporting purposes, a general provision for bad debts is not an allowable deduction from profit - a business can only get relief for specific debtors that have gone bad. However, for financial reporting purposes, companies may choose to have a general provision against bad debts consistent with their past experience of customer payments, in order to avoid over-stating debtors in the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
.
Related accounting topics
Associated accounting issues include recognizing accounts receivable, valuing accounts receivable, and disposing of accounts receivable.In the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, accounts receivable is more commonly known as Credit Control, and most companies have a credit control department.
Other types of accounting transactions
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
include accounts payable
Accounts payable
Accounts payable is a file or account sub-ledger that records amounts that a person or company owes to suppliers, but has not paid yet , sometimes referred as trade payables. When an invoice is received, it is added to the file, and then removed when it is paid...
, payroll
Payroll
In a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons...
, and trial balance
Trial balance
A trial balance is a list of all the nominal ledger accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value...
.
See also
- Electronic billingElectronic billingElectronic billing is the electronic delivery of invoices and related information by a company to its customers. Electronic billing is referred to by a variety of terms,including the following:*Electronic bill payment...
- Debtors
- Factoring (finance)Factoring (finance)Factoring is a financial transaction whereby a business job sells its accounts receivable to a third party at a discount...
- Accounts payableAccounts payableAccounts payable is a file or account sub-ledger that records amounts that a person or company owes to suppliers, but has not paid yet , sometimes referred as trade payables. When an invoice is received, it is added to the file, and then removed when it is paid...
- Balance sheetBalance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
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