What are Account Receivables? | Meaning & Important

Account receivables are legally enforceable documents or invoices that claims amount pending to be paid to the business by the customer or client who have ordered and duly received the goods and services from the business but the amount has not yet been paid. Instead a valid document is prepared that is account receivables for the future payment of the same amount remain to be paid or outstanding to the business. Account receivables are to be realized with the payment within an agreed time frame. The transactions regarding the account receivables are mentioned under the asset column of the balance sheet. This branch of accounts deals with the transaction between customer and business for this goods and services consumed by the customer and the amount due is to be paid in future. Thus, account receivable acts as an legally bounding instrument which is popularly known as promissory note.

Promissory notes are the instruments which are used as an document between debtor and creditor for the future payment of any amount due to the creditor by the debtor.

Important keywords to understand account receivable

As explained above accounts receivables are the amount due by the customer to the business for the sale transaction which duly executed by invoice for the sale of same goods and services in form of hard copy, emailed copy or electronic generated copy of the invoices. The amount regarding account receivable is duly noted or mention on the ledger of the business as to show the transaction for every month as decided by the parties to the sale. Therefore, important keywords to remember to differentiate among transaction implying accounts receivables are as follows:

  • The sale of goods and services should be done.
  • The amount to be received for the very same transaction.
  • The owed by the customer to the business at the end of every month as decided.

The accounts department or team are important part of the account receivable transaction as they are responsible for collection of the money outstanding by the customers to the business. Cashier team are subordinates under accounts department who are responsible for noting the monetary transaction completed by the accounts team.

What all the payments term under accounts receivable?

The most common time span under account receivable is net 30 days, which states that the amount or the payment due to the business by the customer has to be paid within prescribed time frame and if, the customer manage to pay the amount within or before the prescribed date under account receivable shall be offered with an extra discount on the sale transaction which may be decided on the complete discretion of the business. It is known as the special discount offered for the prepayment. Other common terms involved in accounts receivable is net 45, 60 or 30 days end of the month. The creditor is also allowed to charge extra fees or penalty upon the late payment of the same transaction.

Account receivables are entitled under simple accounting transactions but the process of maintaining and collecting payments on account receivable forms an subsidiary account which attracts full time jobs or propositions. The payment term for the sale transaction depends upon the practice followed by the industry as sometimes grace period of 10 to 15 days shall be allowed for the payment which depends upon the standard or status of the customer. It is a clear description of the corporate policy industrial practice and financial status of a customer.

There is a systematic record maintained for the payments of account receivable and where certain account are under doubt or under category of bad debts are not written off at first attempt but the business hire an third party i.e. collection agency or collection attorney to recover such amounts. The very agencies follows the procedure suitable for the recovery within the ambit of laws.

What is account receivable age analysis?

Account receivable age analysis is Known as Debtors Book which is divided in the categories of current 30, 60, 90 days or longer for the realization of the amounts. This prepared report generates Aged trial balance where customers are listed in alphabetical order, or amount outstanding or as per the company chart of accounts. The reports generally do not convey zero balance on any account.

Example to show accounts receivable transaction

Sara is interested in buying gazebos worth rupees 3000 but she doesn’t have enough  money to pay the shopkeeper. The seller or shopkeeper allows Sara 30 days credit for the same sale transaction. Therefore, Sara has to pay the amount within the prescribed period and when it’s paid the transaction shall be written off from account receivables and shifted to sales transactions in cash flow statement.

Where Sara fails to pay Rs.3000 to the seller. It gives seller full authority to approach collection agencies for the recovery of the same amount with interest.

How can business make sure that account receivables are duly paid?

  • Charge late fees or penalty on the amount due to the business by the customers. The penalty or the fees may vary upon the discretion of the business.
  • Business may offer extra discount to the customer who pays within or before the time period prescribe in the account receivables.
  • The accounts department should have different follow up process for such accounts.
  • If customer fails to pay the amount, business may approach reliable agencies for the recovery of such amounts.
  • If it’s not possible to maintain the record of such accounts, business should outsource an accounting firm or use in house accounts department more efficiently.

There as always a potential risk to offer large amount of account receivables as it clearly depends upon the debtor to pay the amount and you can’t analyse one’s malafide intentions of not paying the same amount. It’s completely the discretion of seller to offer the credit or account receivable to any customer as every single customer is not trustworthy or has the goodwill to attract the credit facilities which may be offered by the business to the customer upon certain sales transactions.