The accounts receivable of an organization is responsible for collecting payments for services that the business provided to its clients.It is kept separate from the payable department in order to assess and control revenue.Due to its nature, only few employees are given access to it.
Most accounting systems have different ledgers that the business can use to understand its financial condition. The AR ledger can show statements for each client that the business serves and the employee can send out these statements to the customers asking for payment.The pro to sending statements is that it shows the entries made when the sale occurred as compared to an invoice that only shows less information.
When a client orders products and services from a business, the latter posts the sale in the sales and cash receipts journal. There are usually two columns in this account which are known as debit and credit columns. Sales are recorded in debit columns while payments are recorded in credit columns.
The financial statements of a company show it as an asset on the balance sheet. Since payments are expected within one year of sending the first invoice, it is known as a current asset. A business can use this asset to finance the operations of the company or to pay salaries to employees.The company should therefore have strong AR collections policies in order to ensure that revenue is recognized in the same period as expense.
Investors like to know the status of the company that they will invest in. AR is one of the ways that a investor can look into before venturing into the business. It shows the revenue at different times of the year and how often it is converted into cash.
A business should have a good forecast of how much it will take to receive revenue balances from clients. A good way to measure and assess this is through day sales outstanding. The starting and ending balances are added together and divided by the number of days that are found in the period used.The result can give the business an idea of how strong its AR is and whether it needs to step up collection efforts.
The employees assigned to work in AR usually send invoices to their clients each month with a statement showing outstanding balances and when they are due. The customer in turn sends payment with an invoice number on which balance they would like paid. The business that receives payment should adhere to the request made by the client and cancel out the invoice. This makes it easy for both parties when their is a dispute or when the business sends other invoices to the client.
Accounts payable and accounts receivable usually correspond with each other – the latter updating the former on the amount of money that is available to make payments to debt that the business owes. This way, AP can limit payments that would leave AR with low amounts.
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