Accounts receivables refers to the amount of money that a company is owed by its customers for goods or services that have been delivered but not yet paid for. This is a current asset on a company’s balance sheet, as it represents money that the company expects to receive in the short term.
Companies often offer credit to their customers, which means that the customer is allowed to receive goods or services and pay for them at a later date. This can be a useful way for businesses to increase sales and attract customers, but it also means that the business is taking on some risk. If the customer does not pay on time or defaults on their payment, the business may not receive the money that it is owed, which can impact its cash flow and profitability.
To manage this risk, businesses typically keep track of their accounts receivables and try to collect payment from customers as soon as possible. This may involve sending invoices, following up with customers to remind them of payment deadlines, and using debt collection agencies or legal action if necessary.
Recording Accounts Receivables
A company typically records accounts receivables on its balance sheet when it delivers goods or services to a customer and expects to receive payment at a later date. This means that the company has fulfilled its part of the transaction and is entitled to receive payment from the customer.
In accounting terms, this is known as the “accrual basis” of accounting, which means that revenue is recognized when it is earned, regardless of when payment is received. This is in contrast to the “cash basis” of accounting, which only recognizes revenue when payment is received.
The process of recording accounts receivables may involve creating an invoice or other document that outlines the terms of the sale, including the amount that is owed, the due date, and any applicable discounts or terms of payment. The company will then record the accounts receivables on its balance sheet as a current asset, which represents money that the company expects to receive in the short term.
It’s important to note that the company does not actually receive the money at this point. The money is still owed by the customer and is recorded as a liability on the customer’s balance sheet. The company will only receive the money and record it as revenue once the customer has paid.
Journal Entries and General Ledger
There are several journal entries and general ledger postings that may be involved in the process of recording and managing accounts receivables. Here are some examples:
- Initial sale: When a company makes a sale and expects to receive payment at a later date, it will record the sale as revenue on its income statement and create an accounts receivables on its balance sheet. The journal entry might look like this:
Debit: Accounts Receivables
Credit: Sales Revenue
- Invoice: When the company sends an invoice to the customer to request payment, it may record the invoice as a liability on its balance sheet. The journal entry might look like this:
Debit: Accounts Receivables
Credit: Invoices Payable
- Payment received: When the company receives payment from the customer, it will record the payment as an increase in cash on its balance sheet and a decrease in accounts receivables. The journal entry might look like this:
Debit: Cash
Credit: Accounts Receivables
- Allowance for doubtful accounts: If the company expects that some of its accounts receivables may not be collected, it may create an allowance for doubtful accounts to account for this risk. The journal entry might look like this:
Debit: Allowance for Doubtful Accounts
Credit: Accounts Receivables
These are just a few examples of the journal entries and general ledger postings that may be involved in the process of recording and managing accounts receivables. It’s important to keep in mind that the specifics of these entries will depend on the specifics of the transaction and the company’s accounting policies and procedures.
Accounts Receivables Aging and AIS
Accounts receivables aging is a process of categorizing accounts receivables based on the length of time that the payment has been outstanding. This can help a company to identify which of its customers have overdue accounts and to prioritize its efforts to collect payment.
To generate an accounts receivables aging report, a company typically divides its accounts receivables into several categories based on the length of time that the payment has been outstanding. These categories are often referred to as “buckets,” and may include:
- Current: Payments that are due within the current month
- 1-30 days: Payments that are overdue by 1-30 days
- 31-60 days: Payments that are overdue by 31-60 days
- 61-90 days: Payments that are overdue by 61-90 days
- Over 90 days: Payments that are overdue by more than 90 days
An accounts receivables aging report will typically show the total amount of accounts receivables in each of these categories, as well as the total amount of accounts receivables overall. This can help the company to identify any trends or patterns in its accounts receivables, such as an increase in the number of overdue accounts or a specific customer with a high level of overdue payments.
An accounting information system (AIS) can help to generate accounts receivables aging reports by automating the process of tracking and categorizing accounts receivables. The AIS can store and organize financial data, including information about customer accounts, invoices, and payments, and can use this data to generate reports and analyses on demand. This can save time and resources for the company and help to ensure that the accounts receivables aging report is accurate and up to date.
Credit Terms, Credit Limits, and Accounts Receivable Management
Credit terms refer to the specific conditions under which a company extends credit to its customers. These terms may include the length of time that the customer has to pay, any discounts that are offered for early payment, and any fees or interest charges that may be applied for late payment. Credit terms may also include the methods of payment that are accepted, such as checks, credit cards, or electronic transfers.
Credit limits refer to the maximum amount of credit that a company is willing to extend to a particular customer. This can help to limit the company’s exposure to risk and ensure that it is able to collect payment in a timely manner. Credit limits may be based on a variety of factors, including the customer’s creditworthiness, payment history, and the company’s overall risk tolerance.
Maintaining an optimal level of accounts receivables involves balancing the need to offer credit to customers in order to increase sales with the risk of nonpayment. Credit terms and credit limits can help a company to manage this balance by setting clear expectations for payment and limiting the amount of credit that is extended to each customer.
For example, if a company offers very lenient credit terms, such as long payment periods and no interest or fees for late payment, it may attract more customers but may also have a higher risk of nonpayment. On the other hand, if the company offers very strict credit terms, it may discourage some customers from making purchases, but it may also have a lower risk of nonpayment. By carefully considering its credit terms and credit limits, a company can aim to strike a balance that allows it to increase sales while also minimizing risk.
Managing Bad Debts: Approval and Recovery Process
Bad debts refer to the amount of money that a company is owed by its customers but is unlikely to be able to collect. This may happen if a customer defaults on their payment or becomes insolvent, or if the company is unable to locate the customer or collect payment for other reasons.
In accounting terms, bad debts are typically recorded as an expense on the company’s income statement, as they represent a loss of revenue. The company will also typically write off the corresponding accounts receivables from its balance sheet, as it is no longer expected to receive payment.
Who in the company approves bad debts will depend on the company’s internal policies and procedures. In some cases, the decision to write off a bad debt may be made by the company’s finance or accounting team, based on the likelihood of collection and the company’s credit policies. In other cases, the decision may need to be approved by a higher level of management or the board of directors.
Regardless of who makes the decision, it’s important for the company to have a clear process in place for evaluating and approving bad debts. This can help to ensure that the company is able to accurately account for its financial performance and make informed decisions about its credit policies.