Accounts Receivable

Financial Dictionary -> General Finance -> Accounts Receivable

Accounts Receivable is an accounting transaction, whereby a client is billed for goods and services that he or she has ordered. The accounts receivable usually involves issuing an invoice and either mailing it or delivering it to the clients by electronic means. They, in turn, must pay the bill within a given term, which is called a payment term or credit term.

When a business entity has receivables, it has made sales, allowing them to be on credit. Special and frequent customers typically enjoy this privilege, and they are invoiced periodically. In this way, they avoid making payments for every single transaction that takes place. In contrast to accounts receivable, where companies have outstanding obligations to suppliers or other third parties, these are referred to as accounts payable.

While accounts receivable are usually associated with business entities, individuals can also have them. Receivables are in the form of bi-weekly and monthly paychecks from employers.

Business entities have Accounts Receivable departments, which use a sales ledger to facilitate recordkeeping. Payment terms include Net 30, Net 45, Net 60 and more. This means that payment is due within 30, 45 or 60 days from the date of the invoice. The customer can pay before the final date; in fact, most business entities offer discounts if you choose to pay early. Recording a receivable is achieved through a simple accounting transaction, but maintaining and collecting payments on such accounts can be a very time-consuming process. In some industries, accounts receivable payments are collected as late as 15 days after the due date. Such payment practices are often a result of corporate policy, industry standards, or, of course, clients' financial problems.

Naturally, not everyone makes good on his or her debt. This is why, businesses often make an allowance for bad debt, which is deducted from the total amount of accounts receivable. If payment is not made, some companies hire third party collection attorneys or agencies. These entities make an effort to get the money by negotiating installment payment plans or offering a settlement.

If a client places an order with a company, and they agree on the payment terms in advance, outstanding advances become part of the debt. However, billing is done a number of times in order to claim the advances, which is why outstanding advances do not figure in accounts receivables.

Balance sheets contain records of the funds owed to a company, including accounts receivable. The term "trade receivables" refers to the receivables that clients owe a company. If they are due within a year, accounts receivables are registered as current assets. The calculation of amounts that are still due after payment is made involves debiting receivables and crediting accounts, which is a rather difficult task to do by hand. Accounting software is used to this purpose. The net value of receivables is measured by two methods: the allowance method and the direct write-off method. The former involves establishing a liability account, which reduces the balance for the respective accounts receivable. The sum of the bad debt provision can be calculated using two methods. Each individual debt may be reviewed to decide if it is doubtful or a fixed percentage may be set for all debtors. With the write-off method, the entry comprises of a bad credit expense account that is debited, with the accounts receivable credited in the sales ledger.