What is Accounts Recevable in Bookkeeping and How to Deal With it Like an Expert!

Accounts receivable (AR) are the amounts that customers owe a business for buying its goods or services on credit. AR are an important part of a business’s cash flow and financial statements. In this article, we will explain what accounts receivable are, how they are recorded and reported, and how to manage them effectively.


What are accounts receivable?

Accounts receivable are created when a business sells its products or services to a customer on credit, meaning that the customer does not pay immediately but agrees to pay within a certain period of time, usually 30 to 90 days. For example, if a business sells $1,000 worth of goods to a customer on credit with 30-day terms, it will record $1,000 as accounts receivable and $1,000 as revenue in its books.

Accounts receivable are considered current assets, meaning that they are expected to be converted into cash within one year or less. They are also part of the working capital of a business, which is the difference between current assets and current liabilities. A positive working capital indicates that a business has enough liquid assets to cover its short-term obligations and fund its operations.


How are accounts receivable recorded and reported?

Accounts receivable are recorded using the accrual basis of accounting, which recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is exchanged. This method ensures that the income statement reflects the true performance of a business in a given period.

To record accounts receivable, a business will debit (increase) its accounts receivable account and credit (increase) its revenue account for the amount of the sale. When the customer pays the invoice, the business will debit (increase) its cash account and credit (decrease) its accounts receivable account for the amount received.

Accounts receivable are reported on the balance sheet as a current asset, usually under the heading “trade receivables” or “accounts receivable, net”. The net amount represents the gross amount of accounts receivable minus any allowance for doubtful accounts, which is an estimate of the portion of accounts receivable that may not be collectible.

How to manage accounts receivable effectively?

Managing accounts receivable effectively is crucial for maintaining a healthy cash flow and avoiding bad debts. Some of the best practices for managing accounts receivable are:


-Establish clear credit policies and terms for customers, such as the credit limit, the payment due date, the interest rate for late payments, and the consequences for non-payment.

-Invoice customers promptly and accurately, and send reminders and statements regularly to encourage timely payments.

-Monitor accounts receivable aging, which is a report that shows the breakdown of accounts receivable by the number of days past due. This helps to identify overdue accounts and take appropriate actions, such as contacting customers, sending collection letters, or writing off bad debts.

-Offer discounts or incentives for early payments, such as a percentage off the invoice amount or a free product or service. This can help to improve cash flow and customer loyalty.

-Use automation tools or software to streamline and simplify the accounts receivable process, such as generating invoices, sending reminders, tracking payments, reconciling accounts, and generating reports.

Accounts receivable are an essential part of a business’s bookkeeping and cash management. By understanding what accounts receivable are, how they are recorded and reported, and how to manage them effectively, a business can optimize its cash flow and profitability.

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