What is Accounts Receivables?

Both accounts receivable and accounts payable are dynamic accounts because they affect a company’s cash flow. These dynamic account heads are critical to the business’s health. When the debtor who owes a company money doesn’t pay on time, it disrupts the feelings between the contracting parties. Apart from this, it can lead to cessation of credit facilities, legal issues and loss of reputation to the debtor in the business community. A high value in the accounting receivable column is also bad for the company needing credit. It could affect the working capital leading to a refusal to grant additional credit facilities to such a company. It also affects your payments to your suppliers and stresses the working capital. Thus, the management of your bills receivables or accounts receivable impacts your credibility, health in terms of cash and working capital flow and business relationships. Therefore, it should be managed promptly and adequately to ensure that your business does not suffer from these impediments.

Scope of accounts receivables management

Managing receivables is crucial to the health of your business and maintaining a healthy inflow of cash. When you offer a sale of services or goods on credit, you need to efficiently record and track the due amounts owed to you. All such amounts due from your clients are reflected as outstanding or bills receivable. Thus, the scope of the accounting management of the receivables account in an accounting system are:

• To track and record the amounts and clients whose payments are due.
• Use the credit period thriftily.
• Try to provide closure to the long-pending bills.
• Monitor and improve customer relationships by tracking their payment performance.

What is accounts receivable?

What is the meaning of account receivable? Accounts receivable is the total amount a company has yet to receive from its clients for the services and goods sold on credit. In simple terms, it is the amount that your client owes you regarding the contractual obligations for buying goods or services from you. The person owing you the money is your debtor. Hence, the account is also called the sundry debtor account in a financial statement comprising trade debtors, trade receivables or bills receivable.

The total of the receivables is stated as sundry debtors in the balance sheet. It refers to people to whom one offers services or goods on a credit basis and those businesses or clients from whom the business lends money because of the credit facilities availed. The accounts receivable definition for such companies, clients, parties, companies is bills receivable and considered business assets because the money comes into your account. It is posted to the left or debit side of the balance sheet under sundry debtors since it is a current asset.

Bills receivable example

• On 10^th June 2021, Mohan Enterprises sold televisions worth Rs 95,000 to Vision Traders with a credit period of 15 days. 
• From this moment on, till the bill receivable is finally paid, Rs 95,000 is an account receivable in the books of Mohan Enterprises against the Vision Traders account. 
• If on the 21^st of June, Vision Traders paid Rs 45,000 to Mohan Enterprises, an amount of Rs 45,000 is reduced in the Vision Trader’s account and credited to the sales account in the books of Mohan Enterprises. 
• Post adjustment of the account entries, an amount of Rs 50,000 remains in the accounts receivable account of Vision Traders on 21^st of June and the payment of this is due on the 25^th of June 2021.

Likewise, sell on credit to different customers. The overall accounts receivables account will have individual accounts that need to be updated when you receive the pending payments from these clients. Now let’s see how these accounts are recorded in the journal or original books of accounts.

Also Read: What is Double Entry System of Accounting

Accounts receivable journal entry

• Consider the account receivable example mentioned above. The entries in a journal for this example are shown below.
• On 10^th June 2021, Mohan Enterprises sold televisions worth Rs 95,000 to Vision Traders with a credit period of 15 days. 

From this moment on till the bill is finally paid, Rs 95,000 is an account receivable in the books of Mohan Enterprises against the Vision Traders account. The journal entries for this transaction are:

If, on the 21^st of June, Vision Traders paid Rs 50,000 to Mohan Enterprises, an amount of Rs 45,000 is reduced in the Vision Trader’s account and credited to the sales account in the books of Mohan Enterprises. 

Post adjustment of the account entries, an amount of Rs 50,000 remains in the accounts receivable account of Vision Traders on 21^st of June and the payment of this is due on the 25^th of June 2021.

On the 25^th of June 2021, when the sale bill is fully paid, the journal entries are:

Accounts receivables in financial statements

As already pointed out above, receivable is the due money that is yet to be received from your clients within a short credit period agreed upon by both parties. Hence, a current asset account is dynamic and changes when the amount is paid or partially paid. It is also possible that ongoing transactions may be present in each account. Take the above accounts receivable examples wherein Vision Traders again buys more televisions for Rs 55,000 on the 15^th of June with a 15 day credit period. Then this amount is due on the 30^th of June, and the Vision Traders account will be suitably posted to include this transaction on the 15^th of June.

When the financial statements are prepared, the accounts receivable account will be under the current head assets, including accounts like the bills or accounts receivable, of course, and trade receivables, sundry debtors, etc. Take a look at this sample balance sheet of Max Enterprises in Bangalore to understand the balance sheet better. 

It is clear that all current assets are shown to the left or debit side of the balance sheet, and since current assets and liabilities are dynamic accounts, the balance sheet must have the date it was drawn on. In this case, it is the 17^th of March 2020.

Account receivable process

The salient phases of the accounts receivable transactions are given below, though the accounts receivable meaning or its value may differ from business to business.

• The customer is invoiced as per the credit policy.
• Recording and capturing the due date and credit period in the journal and accounts receivable entry.
• Collection and follow-up scheduling and implementation.
• Generating the bills with overdue days and chronologically listing all overdue bills.
• Sending bill-due letters and reminders with a mention of the due date, the number of days overdue etc.
• On being paid even partially, you must issue a receipt and adjust the entries in the accounts receivables accordingly.
• If a cash discount or any other discount is offered for early payment of the bills, you must make an adjustment entry to the relevant accounts and the receivables account.

Costs of accounts receivables

Accounts receivables always need to be collected promptly and restricted to shorter credit periods as they carry the below-mentioned costs.

• The company needs additional working capital since cash is blocked for several days in the receivables account. This carries a cost in terms of interest paid on loans, working capital, opportunity self-financed costs and more.
• The company also incurs administrative costs on bookkeeping, reminder letters, record keeping, etc.
• The entity has to incur collection costs to collect overdue payments.
• If a party defaults on payments, it becomes a bad debt, and the process of recovering costs also has to be borne.

Always remember that you must offer less credit than you receive from your suppliers to maintain your cash flow.

Also Read: Fund Flow Statement – Meaning, Format And Examples

Conclusion

The importance of receivables management is linked to the flow of cash which is the lifeline of any enterprise. Efficient management of receivables deals with controlling and planning of recovering the dues in the accounts receivable and ensuring a transparent, accurate record of all financial transactions in the bills receivables account. A sale is successful only when the customer buys your product and pays for it, so also it is with the meaning of accounts receivable and credit sales. However, until the payment is received, the amount due gets reflected in the bills receivable account.

Efficient management of accounts receivables benefits your business in many ways. It improves the cash inflow through quicker sales realisations into cash. It is also used to build wider customer bases through credit sales and boost loyal customers’ client relationships by rewarding them. That’s why you need accounting software and a collections management system (CMS). Are you aware that the Legal Tree app can be used for all your accounting needs, including being an efficient CMS? Try the app on your smartphone today!