Accounts Receivable

Adjective: awaiting receipt of payments
Noun: business assets in the form of obligations due from others

Remember that Assets is a balance sheet account. And also recall that there are three types of asset accounts: 1) Current 2) Fixed and 3) Other. Accounts Receivable is a current asset account

An Accounts Receivable account is used by a business that gives its customers time to pay when invoiced, and uses the accrual accounting method. When this is the case, the amount of each invoice goes into this account at the time they are created. It is considered a current asset just as if the business had cash in the bank because it expects to collect payment on those invoices within a year or less.

Accounts Receivable means that the business is carrying contracts where customers agree to pay within a specified time period. This is referred to as the payment terms. For many businesses the terms are thirty days, but some have fifteen day or due upon receipt terms.

If your business keeps its books using the cash accounting method you won’t have an Accounts Receivable account. Your customers will either pay you as soon as you bill them or you will keep invoices filed in a receivables file until they pay you. Either way, the income is not recorded in the books until the invoices are paid.

What is the difference between an invoice and a sales receipt? A sales receipt is given to a customer after they pay for goods or services. An invoice is given before payment is received, even though the customer has already received the goods or services.

Keeping current with your receivables is critical to the cashflow and success of your business. If you have already provided goods or services you most likely have already paid your costs or have invoices from vendors that are due within a certain time period. When your customers don’t pay you on time, it becomes difficult to pay your bills on time.

Gathering and keeping contact information on customers is a very important step in creating invoices. It is not always necessary for those who pay at the point of sale such as in the case of a retail shop, but it is if you expect to be able to collect payments. It is also a good idea to have your payment terms on every invoice and to have a credit agreement signed by each of your customers who will be paying on account.

Take your Accounts Receivable seriously. Be sure to have a collection process in place before you begin offering terms. Speak with an attorney who can help you be sure you do things correctly. I have noticed some businesses don’t have a collection process in place and wait too long before getting serious with those who are behind on payment.

Companies who have a collection system in place and follow it are more likely to collect on debts owed then those who don’t. If a customer or business owes money to more than one company, they are less likely to pay the company that applies little or no pressure and more likely to pay the one that takes its terms seriously.