written by Khatabook | October 26, 2021

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 10th 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 21st 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 21st of June and the payment of this is due on the 25th 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 10th 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:

Dr Vision Traders a/c (Customer)

95,000

Cr (Credit) Sales a/c

95,000

If, on the 21st 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. 

Dr Vision Traders a/c (Customer)

45,000

Dr (Debit) Bank a/c

45,000

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

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

Dr Bank/Cash a/c

50,000

Cr Vision Traders a/c 

50,000

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 15th of June with a 15 day credit period. Then this amount is due on the 30th of June, and the Vision Traders account will be suitably posted to include this transaction on the 15th 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 17th 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 Khatabook app can be used for all your accounting needs, including being an efficient CMS? Try the app on your smartphone today!

FAQs

Q: How can I maintain my accounts receivables best?

Ans:

Here are some tips for managing your accounts receivable:

  • Track your bills.
  • Monitor the overdue bills and ensure collections of all due bills.
  • Track and reward the payment performance of your clients.
  • Have a collection schedule daily and allocate the responsibility of collections to a dedicated person.
  • Use internal credit control measures and techniques.
  • Always offer a lesser credit period than you receive from your suppliers.
  • Use accounting software for accurate and auto-tracking of the accounts receivable.
  • Invest in a CMS or Collections Management System like Khatabook.

Q: Are bills receivable the same as accounts receivable?

Ans:

Yes.  A single party or account may have more than one bill due. So bills receivable and accounts receivable both will show which accounts owe you money and the bills due.

Q: Where do accounts receivable show in the financial statements?

Ans:

The accounts receivable is money that comes into your account and is shown on the debit side or as a current asset in financial statements. The total is also posted under current assets in financial statements.

Q: What are the costs attached to accounts receivable?

Ans:

The business needs working capital additionally as money is blocked in receivable accounts. The costs involved are opportunity self-financed costs, loan interest, collection costs of sending reminders, default costs and administrative costs in bookkeeping etc.

Q: What is the credit management system?

Ans:

When businesses grow, their accounting complexity is increased. A Credit or Collections Management System or CMS can help automatically record, track, monitor and generate daily reports of the receivables. It contains the amounts, due date, number of days overdue, discounts offered on early payment and more, to help manage the receivables efficiently.

Q: Why are accounts receivable considered an asset?

Ans:

When you sell goods on credit, the money is due in your account receivable meaning that the accounts receivable of your client’s account reflect the money due to you. One of the golden rules of accounting is that what goes out of your account must be credited and what comes into your account is debited. In the balance sheet, the accounts receivables figure as a current asset as money comes into the account and is debited and found on the left side.

Q: What are some of the benefits of managing my accounts receivables well?

Ans:

Here are some benefits that tracking and managing your accounts receivables well brings to your business.

  • It helps maintain a healthy cash flow.

∙It keeps the bad debts to a minimum

∙It improves customer relationships and satisfaction

  • It can boost the volume of sales

Q: What is a Journal?

Ans:

A journal is a prime entry or original entry book. The money transactions are recorded from the accounting books and tallied with source documents like cash receipts, invoices etc. A chronological record is maintained for all transactions in the double-entry accounting system.

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