Accounts Receivable Basics

Accounts receivable -- also known as customer receivables -- represent money a business expects from clients after abiding by the corresponding contractual agreements. These could relate to selling merchandise, providing a service, or both. The technical term may vary by industry, and could be "fees receivable" or "commissions receivable" in sectors as varied as banking, brokerage and consultancy.

Credit Sales

The concept of "accounts receivable" draws on credit sales -- the kind that let a customer receive goods and pay for them at a later date. When a business ships merchandise to a patron, it records -- or recognizes, as financial specialists put it -- outright revenues, regardless of when the customer remits funds. Credit sales contrast with cash-on-delivery transactions, which call for advance payments or remittances at merchandise delivery.

Bookkeeping

The bookkeeping process for customer receivables involves a pastiche of accounts, depending on the underlying transaction. When a company ships goods to a client and fulfills its part of a contractual agreement, a bookkeeper debits the customer receivables account and credits the sales revenue account. When the customer remits funds, the junior accountant -- the other name for a bookkeeper -- debits the cash account and credits the customer receivables account (to bring it back to zero). When accountants talk about debiting cash -- an asset account -- they mean reducing funds in corporate coffers.

Bad Debt Expense

Customers sometimes can't pay for goods received either because they're going through the doldrums of a bad economy and can't make operating ends meet, or they're coping with bankruptcy tedium, near-insolvency or gradual liquidation. When a client can't remit money owed, credit managers may write off the customer's account outright or set a loss reserve. In accounting terminology, "writing off" an account means taking money the customer owes off corporate books. In an outright write-off, a junior accountant debits the bad debt expense account and credits the customer receivables account. The allowance method -- or gradual write-off approach -- requires that the bookkeeper debit the bad debt expense account and credit the "allowance for doubtful items" account.

Financial Reporting

If you understand Accounts Receivable 101, you see why financial managers chronicle receivable-related transactions in different financial statements. As short-term assets -- the kind that a company will use in the next 12 months -- customer receivables make it into a statement of financial position, also known as a statement of financial condition or balance sheet. This economic synopsis is also home to "allowance for doubtful items" and cash accounts. Bad debt is an income statement item.

References

• Auburn University: Reporting and Analyzing Receivables
• Deloitte: IAS 1 Presentation of Financial Statements
• Government of the Northwest Territories: Job Description --: Accounts Receivable Clerk
• Maine's Public Universities: Accounts Receivable Technician
• The University of Texas at El Paso; Cash and Receivables; Sid Glandon
• "Intermediate Accounting"; Cash and Receivables; J. David Spiceland, et al.; 2007