Introduction

What Is Accounts Receivable?

Accounts Receivable is a means by which you can record sales and send bills and statements to your customers. Simply put, Accounts Receivable keeps track of your company’s revenues and your customer’s unpaid bills.

When a sale is recorded, an invoice is sent to the customer. Besides the total amount of money owed, the invoice usually contains information about any discount you may be offering your customer as incentive to pay the invoice in a timely fashion, and when the total amount of the invoice is due (the terms of the invoice); the products or services purchased by the customer; and the amount of freight or tax attributed to the purchase.

The revenue is recorded as income when you post the invoice. Normally, when you post an invoice the system credits, or increases, the balance in a revenue account. Since the customer has not yet paid the invoice, the amount of the invoice also debits, or increases, an asset account called Accounts Receivable. Some examples of receivable accounts are Notes Receivable, Employee Loans Receivable, and Customer Accounts Receivable. The total amount in Accounts Receivable represents the total amount of revenues which have not yet been collected. If General Ledger is part of your system, Accounts Receivable postings also update the General Ledger balances, providing you with up-to-date financial information.

The following “T charts” shown the effect of the posting of a $180.00 invoice to a customer for the purchase of office supplies:

When the check is received from the customer, it is entered as a Cash Receipt. At this time you can record any discounts the customer has taken in addition to the discounts offered on the invoice. A cash receipt credit (decreases) Accounts Receivable; debits (increases) cash; and debits, or increases, any discount given account. Customer discounts are debits, usually to a contra-revenue account.

Below is a “T chart” example of a cash receipt which includes a 2% discount amount.

Assume it is payment for the invoice in the first example.

Cash Receipts can also be used to record sales that do no include an invoice (for example, a cash sale). This type of sale is called a “Direct Receipt”. With a direct receipt, the only record of the sale is the receipt itself and no receivable is incurred. Consequently, entry of a direct receipt debits (increases) the balance of the cash account instead of increasing the receivable. As with all sales, the offsetting credit amount increases the balance in a revenue account.

The following “T charts” shown an example of a direct receipt for $50.00 of office supplies.

Adjustments can be entered to make changes to invoices that you have already posted. You can adjust the amount of an invoice or change the revenue account to which the invoice was posted. The following “T charts” show a typical example of an adjustment to change the amount of an invoice. The invoice was originally entered for $220.00 but actually should have been $200.00.

For additional information and examples regarding postings to General Ledger from Accounts Receivable, refer to Appendix A of this manual.

The Accounts Receivable Cycle

Accounts Receivable is normally operated on a monthly accounting cycle. During the month you enter and post invoices as sales occur, enter and post adjustments as necessary, and enter and post cash receipts as they are received. Once a month you may want to generate service charges and/or dunning letters for invoices that are more than 30 or 60 days overdue. If you issue refunds, these should also be done once a month. Also, most businesses print statements for their customers once a month. At the end of the month, print the monthly reports and balance the Accounts Receivable for the current month and prepare for next month’s processing.

Reports can be printed and inquiries can be used to supply information at any time during the month.