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If you're a new business owner, or have recently switched accounting methods from cash to accrual accounting, you may not be familiar with accounts receivable.
Accounts receivable plays an active role in the accounting cycle. Accounts receivable totals directly affect your net income since they are considered revenue, but the subsequent collection of any receivables balances does not affect your retained earnings, since they are already part of your revenue total. In addition, accounts receivable is a permanent account and is not affected by closing entries.
If you sell goods or services to your customers on credit, your business will always have an accounts receivable balance in your general ledger. Accounts receivable reflects the amount of money owed your business from the goods and services that you provided your customers on a credit basis.
It’s important for business owners to manage their accounts receivable properly, from initial credit application to collection of the accounts receivable balance. If you’re concerned about how quickly your customers are paying, calculating your accounts receivable turnover ratio can provide some insight.
Accounts receivable reflects the money that is owed to your business for providing goods and services. Accounts receivable are considered an asset and are reflected on your balance sheet as such.
Accounts payable is the money that you owe vendors for providing goods and services to your company. Accounts payable is considered a liability on your balance sheet since it is money that you currently owe.
One easy way to remember the difference is that your accounts receivable balance is likely recorded on your customer’s books as an accounts payable item.
One of the signs of a successful business is the ability to increase sales. Providing credit to a select group of customers can do just that, providing those customers can also help to build customer loyalty, allow you to customize sales events for credit customers, and grow your business.
The ebb and flow of your accounts receivable can also help you better manage financial projections, which can be helpful when creating a budget for your business.
Processing accounts receivable is a straightforward process. If you’re looking to offer credit terms to your customers for the first time, here are the steps you need to follow:
Be sure to develop a credit approval process for your business. This process must be used by you and your bookkeeper when invoicing customers on credit.
Tips for developing a credit approval process
There are a number of things you should do prior to offering credit to your customers. Here are the things that need to be completed:
Invoicing is important. Be sure you have the ability to produce an accounts receivable invoice for your customers immediately.
For instance, you sell $200 worth of pens to your customer, charging them $8 in sales tax. Whether you’re posting invoices manually into a ledger, or letting your accounting software handle the posting, here is what the journal entry would look like for this accounts receivable example:
Date | Account | Debit | Credit |
---|---|---|---|
4-5-2020 | Accounts Receivable | $208 | |
4-5-2020 | Sales | $200 | |
4-5-20 | Sales Tax | $8 |
Tips for creating an invoice
Sending an invoice to your customers promptly helps to ensure that payment will be made promptly.
It’s vital that you stay on top of your accounts receivable balances. This way you can make sure that customers are reminded when payment due dates draw closer as well as follow up when payments are late.
If you’re using accounting software, you can run a weekly accounts receivable report to see which accounts are past due and which will soon be due. This can help you collect past due accounts.
Tips for tracking accounts receivable balances
Proper management of your accounts receivable balances is important. Here are a few tips to ensure that you receive payments on a timely basis:
The final step in the accounts receivable process is posting payments that you have received from your customers.
Once you receive payment from your customer, the journal entry would be:
Date | Account | Debit | Credit |
---|---|---|---|
4-5-2020 | Cash | $208 | |
4-5-2020 | Accounts Receivable | $208 |
Note that the sales tax is not included in this journal entry, because sales tax remittance is handled in a separate transaction.
Tips for posting payments
The easiest way to post customer payments is by accepting payments online. However, many people still have their customers remit payments through the mail. Whatever your method, here are some tips to manage customer payments properly:
What business doesn’t want more customers? If you’re looking to expand your customer base, selling products and services to your customers on credit will help tremendously.
It’s important that the process is handled properly, including proper vetting of customers, offering credit terms that are suitable for your business cash flow, and being proactive in collecting accounts receivable balances.
The best way to handle accounts receivable is by using accounting software. If you’re in the market for accounting software that is a good fit for your business, be sure to check out The Ascent’s accounting software reviews.
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