Business, Legal & Accounting Glossary
Amounts due from customers, also described as a trade debtors. Accounts receivable are obligations due to the company from customers. Suppose a company sells a customer $50 in merchandise. The sales account increases by $50 and accounts receivable increases by $50. When the customer pays, cash increases $50 and accounts receivable decreases $50, reducing the accounts receivable for this obligation to $0. Since the company continually makes new sales, however, accounts receivable ordinarily has a positive balance. Accounts receivable are normally due within 90 days or less and are highly liquid. Indeed, in certain industries, accounts receivable are regularly sold or “factored” to receive immediate cash. Accounts receivable are therefore listed on the balance sheet as a current asset, below (completely liquid) cash and above (relatively less liquid) inventory. Accountants assume that the longer an account receivable is outstanding, the less likely it will be paid. Thus accounts receivable are regularly “aged” and written down to reflect the likely portion of accounts receivable that are uncollectible. Rising accounts receivable could mean customers are paying more slowly, but it can also indicate higher sales.
Amounts due to the business from customers for merchandise or services purchased on credit.
The business does not receive payment for these amounts immediately; the delay before payment is referred to as “Days Sales Outstanding (DSO).” Like Accounts Payable, this might also refer to the department responsible for billing customers.
n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business’s problems in paying its own debts. Evaluation of the chances of collecting based on history of customers’ payments, quality of customers and age of the accounts receivable and debts is important. A big mistake made by people overly eager to buy a business is to give too high a value to the accounts receivable without considering the chances of collection.
Accounts receivable is one of a series of accounting transactions dealing with the billing of customers who owe money to a person, company or organization for goods and services that have been provided to the customer. In most business entities this is typically done by generating an invoice and mailing or electronically delivering it to the customer which is to be paid within an established timeframe called credit or payment terms.
An example of a common payment term is Net30, meaning payment is due in the amount of the invoice 30 days from the date of invoice. Other common payment terms include Net45 & Net60 but could, in reality, be for any time period agreed upon by the vendor and client.
While booking a receivable is accomplished by a simple accounting transaction the process of maintaining and collecting payments on the accounts receivable subsidiary account balances is and can be a full-time proposition. Depending on the industry in practice accounts receivable payments can be received up to 10 – 15 days after the due date has been reached. These types of payment practices are sometimes developed by industry standards, corporate policy, or because of the financial condition of the client.
On a company’s balance sheet, accounts receivable is the amount that customers owe a business. Sometimes called trade receivables, they are classified as current assets. To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credit the receivable in the journal entry. The ending balance on the trial balance sheet for accounts receivable is always debit.
Business organizations which have become too large to perform such tasks by hand (or small ones that could but prefer not to do them by hand) will generally use accounting software on a computer to perform this task.
Associated accounting issues include recognizing accounts receivable, valuing accounts receivable, and disposing of accounts receivable.
Accounts receivable departments use the sales ledger.
Since not all customer debts will be collected, businesses typically record an allowance for bad debts which is subtracted from total accounts receivable. When accounts receivable are not paid, some companies turn them over to third party collection agencies or collection attorneys who will attempt to recover the debt via negotiating payment plans, settlement offers or legal action. Outstanding advances are part of accounts receivables: If a company gets an order from its customers with advance agreed in payment terms. Since no billing is being done to claim the advances several times this area of collectable is not reflected in Accounts Receivables. Ideally, since advance payment is mutually agreed term, it is the responsibility of the accounts department to take out periodically the statement showing advance collectable and should be provided to sales & marketing for collection of advances. The payment of accounts receivable can be protected either by a letter of credit or by Trade Credit Insurance.
Companies can use their accounts receivable as collateral when obtaining a loan (Asset-based lending) or sell them through Factoring (finance). Pools or portfolios of accounts receivable can be sold in the capital markets through a Securitization.
Companies have two methods available to them for measuring the net value of account receivables, which is computed by subtracting the balance of an allowance account from the accounts receivable account. The first method is the allowance method, which establishes a contra asset account, allowance for doubtful accounts, or more simply, allowance, as the offset to accounts receivable. Allowance is a contra asset that offsets the accounts receivable account to derive the net accounts receivable depicted in the balance sheet. The amount of the allowance can be computed in two ways; through the analysis based on sales method and analysis based on accounts receivable method. The reason a contra asset receivable account is necessary is to adhere to the matching principle of accounting, which mandates that accrual basis companies match all revenues and expenses with the period in which they are earned and incurred, respectively. The journal entry that establishes the allowance for doubtful accounts consists of debiting an expense account, usually referred to as an uncollectible account expense, and crediting the allowance contra asset account. Once it has been deemed that a particular account is uncollectible, it would be necessary to take the account off a company’s books by debiting allowance for doubtful accounts and crediting the associated accounts receivable account.
The second method, known as the direct write off method, is simpler than the allowance method that allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting an uncollectible expense account and crediting the respective account receivable.
For tax reporting purposes, the direct write-off method must be used; however, for financial reporting purposes, it is necessary to use the allowance method because it matches a period’s revenue with associated expenses – a fundamental concept of accounting known as the matching principle.
Make sure that the accounts receivable for Acme are up to date before shipping anything else to them.
Accounts Receivable reports that Acme have not paid their bills for ninety days.
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This glossary post was last updated: 26th April, 2020 | 13 Views.