A legally enforceable claim for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. The process involves customer onboarding, invoicing, collections, deductions, exception management, and cash posting after payment is collected. Accounts receivable are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable is shown in a balance sheet as an asset. It is one of a series of accounting transactions dealing with the billing of a customer for goods and services that the customer has ordered. These may be distinguished from notes receivable, which are debts created through formal legal instruments called promissory notes. Accounts receivable can impact the liquidity of a company.
Aging Schedule
A report that categorizes AR based on how long an invoice has been outstanding (e.g., 0-30 days, 31-60 days). It’s the primary tool for spotting slow-paying customers.
- Allowance for Doubtful Accounts (ADA): A contra-asset account that estimates the dollar amount of receivables a company expects not to collect. This ensures the balance sheet doesn't overstate the company's value.
- Bad Debt Expense: The cost recognized when a specific debt is deemed uncollectible.
- Days Sales Outstanding (DSO): A metric calculating the average number of days it takes a company to collect payment after a sale has been made. The goal is a lower DSO, which indicates an efficient collection process and better liquidity.
- Net Realizable Value (NRV): The total amount of AR minus the Allowance for Doubtful Accounts. It represents the actual cash the company realistically expects to see.
The AR Lifecycle
The process of managing receivables involves several critical steps to ensure the business maintains healthy cash flow:
- Credit Extension: Assessing a customer's creditworthiness before allowing them to buy now, pay later.
- Invoicing: Sending a clear request for payment with specific Credit Terms (e.g., Net 30, meaning payment is due in 30 days).
- Collection: Monitoring the aging schedule and following up on overdue accounts.
- Reconciliation: Matching incoming payments to the correct invoices in the general ledger.
Importance of AR Management
Effective AR management is the difference between a profitable company on paper and a company with actual cash in the bank. If a business has high revenue but fails to collect its receivables, it may struggle to pay its own bills, leading to a liquidity crisis.
Additional Acronyms for AR
- AR - Augmented Reality
