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Accounts receivable, abbreviated as AR or A/R, are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. These are generally in the form of
invoices An invoice, bill or tab is a commerce, commercial document issued by a sales, seller to a buyer, relating to a sale transaction and indicating the product (business), products, quantities, and agreed prices for products or Service (economics), se ...
raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable is shown in a
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
as an
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
. It is one of a series of
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
transactions dealing with the billing of a
customer In sales Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. The seller, or the provider of the goods or services, complet ...

customer
for
goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
and
services Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administrative service, a required part of the workload of Faculty (academic staff), university faculty * Civil service, the body of employees of a governm ...
that the customer has ordered. These may be distinguished from notes receivable, which are
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
s created through formal
legal instrument ''Legal instrument'' is a legal Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environ ...
s called
promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a legal Law is a system of rules created and law enforcement, enforced through social or governmental institutions to regulate behav ...
s.


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
invoice :''See also Voucher: an invoice is within the European union primarily legally defined by the EU VAT directive as an accounting voucher (to verify tax and VAT reporting) and secondly as a Civil law (common law) document. An invoice, bill or tab is ...

invoice
and either mailing or
electronically The field of electronics is a branch of physics and electrical engineering that deals with the emission, behaviour and effects of electrons using electronic devices. Electronics uses active devices to control electron flow by amplifier, amplificat ...
delivering it to the customer, who, in turn, must pay it within an established timeframe, called ''credit terms'' or ''payment terms''. *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 collections department seeks the debtor, the cashiering team applies the monies received. Accounts receivable can make impact on liquidity of the company, thus it is important to pay attention to this metrics. Therefore the investment risk must be as small as possible.


Payment terms

An example of a common payment term is Net 30 days, which means that payment is due at the end of 30 days from the date of invoice. The
debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that ...
is free to pay before the due date; businesses can offer a discount for early payment. Other common payment terms include Net 45, Net 60 and 30 days end of month. The creditor may be able to charge late fees or interest if the amount is not paid by the due date. In practice, the terms are often shown as two fractions, with the discount and the discount period comprising the first fraction and the letter 'n' and the payment due period comprising the second fraction. For instance, if a company makes a purchase and will receive a 2% discount for paying within 10 days, while the whole payment is due within 30 days, the terms would be shown as 2/10, n/30. 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 Debits and credits in double entry bookkeeping are entries made in account ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, would record tr ...
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 A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade International trade is the exchange of capital Capital most ...
or by
Trade Credit Insurance Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy In insurance, the insurance policy is a contract A contract is a legally binding document between at least two parties that de ...
.


Accounts Receivable Age Analysis

An Accountants Receivable Age Analysis, also known as the Debtors Book is divided in categories for current, 30 days, 60 days, 90 days or longer. The analysis or report is commonly known as an Aged Trial Balance. Customers are typically listed in alphabetic order or by the amount outstanding, or according to the company chart of accounts. Zero balances are not usually shown.


Bookkeeping

On a company's
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
, accounts receivable are the money owed to that company by entities outside of the company. Account receivables are classified as
current asset In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compar ...
s assuming that they are due within one
calendar year A calendar is a system of organizing days. This is done by giving names to periods of time Time is the indefinite continued sequence, progress of existence and event (philosophy), events that occur in an apparently irreversible process, ...
or
fiscal year A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial report Financial statements (or financial reports) are formal ...
. To record a journal entry for a sale on account, one must
debit Debits and credits in double entry bookkeeping are entries made in account ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refe ...

debit
a receivable and
credit Credit (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the R ...
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 A trial balance is a list of all the general ledger In bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organisations. It involves preparing source documents ...
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 describes a type of application software that records and processes accounting transactions within functional modules such as accounts payable, accounts receivable, Journal entry, journal, general ledger, payroll, and trial ba ...
on a
computer A computer is a machine that can be programmed to Execution (computing), carry out sequences of arithmetic or logical operations automatically. Modern computers can perform generic sets of operations known as Computer program, programs. These ...

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 Bad debt occasionally called Uncollectible accounts expense is a monetary amount Quantity or amount is a property that can exist as a multitude Multitude is a term for a group of people who cannot be classed under any other distinct category, ...
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 An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
. The allowance method can be calculated using either the income statement method, which is based upon a percentage of net credit sales; the balance sheet approach, which is based upon an aging schedule in which debts of a certain age are classified by risk, or a combination of both. 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 direct write-off method is not permissible under
Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms oper ...
. 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 is the process in accounting by which a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of ...
.)


Special uses

Companies can use their accounts receivable as
collateral Collateral may refer to: Business and finance * Collateral (finance) In loan agreement, lending agreements, collateral is a Borrower, borrower's pledge (law), pledge of specific property to a lender, to Secured loan, secure repayment of a loan. ...
when obtaining a
loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
(
asset-based lending 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 loan, mortgage is an example of an asset-based loan. More commonly however, the phrase is used to de ...
). They may also sell them through factoring or on an
exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green Township, Morgan County, Indiana, Morgan County, in the U.S. state of In ...
. Pools or portfolios of accounts receivable can be sold to third parties through
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 (or other non-debt assets which generate receivables) and selling ...
. 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 financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
.


See also

* Electronic billing * Debtors *
Bad debt Bad debt occasionally called Uncollectible accounts expense is a monetary amount Quantity or amount is a property that can exist as a multitude Multitude is a term for a group of people who cannot be classed under any other distinct category, ...


Other types of accounting

*
Accounts payable Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, ...
*
Payroll A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks pe ...
*
Trial balance A trial balance is a list of all the general ledger In bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organisations. It involves preparing source document ...


Notes and references

{{Authority control Accounting terminology Asset de:Forderung#Rechnungswesen