Skip to content

What is Accounts Receivable? | Definition and Examples

accounts receivable - Blog
Reading Time: 6 minutes

Summary: In a business, it is vital to track revenue and expenses. An accounting executive maintains all the finances with the help of software. Accounting of a company has two aspects accounts payable and accounts receivable. Here, we are going to learn in detail about accounts receivable. A study says that 48% of clients or customers delay payments.

“You have to understand accounting and you have to understand the nuances of accounting. It’s the language of the business”.                   

-Warren Buffet

Accounts receivable and accounts payable are significant for an enterprise. The business should maintain a healthy balance of both to thrive continuously.

Accounts payable is the amount that has to be paid to the suppliers by the company. Note that the accounts payable category is created only when the company purchases goods on credit.

What is Accounts Receivable?

Accounts receivable is the amount that has to be paid to the company by the customers. Enterprises keep records of the funds their customers owe them in the balance sheet under the accounts receivable section. Invoices are also included for the work performed to the clients on credit. Both accounts payable and accounts receivable are recorded in the ledger. These records help potential investors investigate or calculate the company’s financial health.

A company allows customers to pay later after agreeing to the terms and signing a contract. Usually, the customer is liable to pay back within 30 days. Based on the company’s agreement policies, it can extend to 60 days or 90 days. Sometimes, the credit period can also be extended for over a year. Making a customer sign a contract is a secure way to get back the amount. Large enterprises expect the customer to pay a deposit and sign a contract. Later the customer can pay the remaining amount based on the contractual terms.

  • First, the customer signs a contract and purchases the product.
  • An invoice is generated and sent to the customer.
  • The invoiced amount is saved in the accounts receivable category, noting the terms.

In the balance sheet, account receivables are treated as current assets.

Accounts receivables can be subdivided into trade receivables and non-trade receivables. The amount received from the company’s business partners is termed trade receivables. The amount due from the employees of that company comes under non-trade liabilities.

What are the examples of Accounts Receivable?

Accounts receivable are created immediately after a customer purchases a product. Some examples are money owed by the customer recorded as a credit, which can be a subscription fee or even instalments.

Where can you find accounts receivable?

Spot your accounts receivable balance under the current assets category of the general ledger. It adds value to the company, so it is considered an asset.

To know more about the payments made by individual customers, you must look into the accounts receivable subsidiary ledger.

Example of Accounts Receivable

Suppose you are a company manufacturing car air conditioners. The customer places an order for 35 air conditioners worth Rs 4,00,000 lakhs. As soon as the purchase is finalised, you must ask the customer to sign a contract to pay back within 60 days. After the sale, an invoice is generated, and the amount is recorded under the accounts receivable category along with the contract terms. A company can charge a late fee for defaulters if the money is not received within the contractual period.

Later, when the customer pays back the amount, the cash segment in the balance sheet increases. The value of the accounts receivable section decreases.

Benefits of Accounts Receivable

Accounts receivable has its own benefits to offer in the company. Note that accounts receivable is considered current assets in the balance sheet. It gauges the company’s ability to cover short-term liabilities without any additional cash from other sources.

The accounts receivable turnover ratio calculates the frequency of accounts received during an accounting period. Days sales outstanding (DSO), the duration is taken to collect the payment from the customer.

Disadvantages of Accounts Receivable

If your customer fails to pay their bills, you will experience a lot of bad debts, which is not suitable for your enterprise. This issue arises because of the loose credit policy. A company should be vigilant in these matters to save itself from the economic downturn.

<<<Also read: 5 Benefits of Accounts Receivable Automation You Should Know>>>

Why is it necessary to track accounts receivable?

It is essential to track accounts receivable to record all the customers who have paid the amount. If you fail to acquire money from the customers, it will impact your profitability.

Send an invoice immediately after purchase. The longer you wait, the less likely you will receive your amount from the customer. Documenting it on time helps to manage taxes promptly.

Accounts Payable Vs Accounts Receivable

Accounts payable is the amount paid by the company to the vendors. Accounts receivable is the amount paid by the customers to the company. In the balance sheet, the account receivable appears as an asset. But accounts payable appears as a liability in the balance sheet.

The main difference would be that service businesses will have more account receivables than account payables. On the other hand, retail businesses will have more account payables than account receivables.

What happens if the customer never pays back?

Sometimes, the customer never pays back the money. If that becomes clear, write it as a bad debt expense or a one-time charge.

Tips for collecting account receivable amount

You must follow up with your customer to make all the payments on time. Sometimes it is stressful to make them pay their dues. There are some measures which will help you to collect all the dues on time.

Confirm receipt of the invoice

Sometimes, the invoice you send via email may accidentally get deleted. A week after sending the invoice, call the customer and confirm if they have received the invoice. It is the best way to ensure and enable the customer to make payment promptly.

Communicate with your clients

A study says that most customers fail to pay the credit within 60 days. That is mainly because of the lack of communication between the customer and the company. Effective communication will enable the customer to pay the dues on time. Follow up frequently to allow them to pay it on time.

Provide more options for the customers to pay

As the due date is nearing, customers try to delay it even more. Give them even the credit card option to pay so you will get paid on time.

Financial incentive

Offering financial incentives is a boon. For example, give them a 2% discount and set a duration of 20 days. Convey to your customers that if they pay within 20 days, they will be given a discount of 2%. This will compel them to pay sooner.

Schedule reminders

Call the customer and remind them about the payment. You can call them in 15, 30, 45, or 60 days. This is also a good strategy to collect payment on time.

Extend credit with moderate terms

Technology has advanced a lot in recent years. The customer can pre-pay the order before it reaches its destination. The companies selling high-cost goods, pre-payment is doubtful, so it is better to set up an option for a credit line. Ensure that both parties are in agreement with the payment terms.

Use Accounting Software

Accounting Software has a user-friendly interface. It eases a lot of manual labour and stress. It offers a highly organised interface for recording and tracking business transactions.

A company will have the burden of sending an invoice, then confirming the receipt with the customer and following up for late receipt. To avoid all the hassle, it is better to deploy accounting software in the company to take care of the finance and accounting operations.

Thus, accounts receivable are essential for managing the company’s accounts. An accurate record of accounts receivable is mandatory for avoiding bad debts. Advanced accounting software will aid in maintaining records of all transactions. Each time prepare and sign an agreeable contract for both parties. Be prompt in sending reminders to the customers. No company would wish for an economic turndown. Plan and execute your strategies for the benefit of the company.

accounts receivable

Sage 300

Sage 300 is efficient and trusted ERP software for small and medium-sized businesses. The key benefit of implementing this ERP software for your business is its flexibility to manage operations like :

  • Core accounting and finance.
  • Operations and inventory.
  • Project and vendor management.
  • Sales marketing and customer service.
  • Human resources management.

Sage 300 is a boon for accounting operations. It is fully automated software and can send invoices as soon as the purchase is made, confirm it, set reminders for payment and keep track of all the customers paying trends.

Just remove all the complexities of accounting functions by deploying Sage 300 for your company. We provide you with all the training and support you need to work efficiently.

Choose Sage 300 today and learn how Sage software can streamline your business proficiently.

Know more about our product:

Sage Software Solutions is a leading IT company with an array of advanced ERP Software solutions. Our proprietary products — Sage X3 and Sage 300 will help you cut your operational expenses, improve business productivity, increase operational efficiency, forge robust customer relationships, and strengthen association with vendors, suppliers, and distributors. So, if you are looking to reinforce your business fundamentals and emerge as an industry leader, then please schedule a call with one of our sales representatives.

Get in touch

This field is for validation purposes and should be left unchanged.

Related Post