What Are the Functions of Accounts Receivable?
Accounts receivable are current asset accounts found on the balance sheet in a accounting system. If one company extends credit to another company for purchases, each time the customer completes a sale, its account is charged. Accounts receivable function as current assets because a company anticipates receiving cash payments within a year. Accounts receivable service several other functions in the accounting process as well.
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Tracking Customer Accounts
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Accounts receivable track each customer that has a credit account with a company. Customers with current balances are listed on the balance sheet, and each accounts receivable has a sub-listing on the accounts receivable page in the general ledger. This information enables a company to know who owes the company, how much, and whether the account is current or delinquent.
Record Current Assets
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As was mentioned previously, accounts receivable are considered current assets, even though the actual cash has not yet been received. Because most accounts receivable accounts are expected to be paid off between 30 days and one year, these accounts are considered liquid, which is why they are listed right after cash in the chart of accounts.
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Increase of Sales
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Companies offer credit to their customers in the hopes it will generate more sales. When recording an accounting transaction in which the customer utilized the credit option, accounts receivable are debited and sales are credited. This means that although payment has yet to be received, the sale counts toward the current accounting cycle. This boosts the revenue side of the accounting equation.
Measurement of Company Practices
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A company can use its accounts receivable to gauge how well its general practices are working. For example, if a company has 100 accounts receivable, analyzing how old each account is can help determine whether the company needs to revise its credit policy. For example, if a company has a customer whose account is frequently overdue, rescinding the company's credit account or lowering its credit limit is something a company can consider. If customers are taking the full 30 to 60 days allowed to pay off their accounts, a larger net discount might encourage earlier payoffs. If there are customers who have not made a payment on their account for more than 90 days, a decision about accelerated collection methods becomes necessary.
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References
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