What Do Accountants Do With Accounts Receivable?

Accounts receivable is responsible for the collection of invoices.

Accounts receivable is a critical function of a company's order-to-cash process. After sales are made and products are shipped, the accounts receivable department is tasked with transforming the sales into cash by collecting from customers who borrow on trade credit. The department is also responsible for ensuring that customers who borrow on trade credit are creditworthy. Internal accountants help support and facilitate these critical responsibilities.

Account Transactions

For every sale that is made, the accounts receivable account is involved in the transaction. Since customers are able to borrow to make purchases, customer billing directly increases accounts receivable. Every time payments are received, accounts receivable decreases. These occurrences need to be recorded in a timely manner. It is the job of the departmental accountant to either record these transactions or ensure that automated enterprise software properly performs the function.

Account Reporting

All companies need to close their accounting ledgers in accordance with predetermined accounting periods. It is the internal accountant’s responsibility to prepare accounts receivable for reporting. To accomplish this, the accountant must review the account balances for the period and make any adjusting or correcting entries to ensure that balances are accurate.

Account Integrity

No matter how well an accounting system is designed, errors will occur. Accountants monitor transactions and account balance activity in order to locate these errors and correct them before financial information is reported for taxes or SEC filings. Account balance reconciliation is the process of verifying the substance of an account’s balance by reviewing and testing the transactions that make up the account balance.

Account Analysis

Accountants in the accounts receivable department are also responsible for analysis of key financial data. Days sales outstanding is a financial metric that measures how many days it takes to convert sales into cash. This measure is watched closely by finance executives, and it is the function of accounts receivable to manage this performance indicator. The internal accountant will calculate days sales outstanding and analyze which transactions are impacting the calculation. Bad debt, which is a noncollectable account, must be estimated prior to any losses and included in periodic financial reporting.

References

• Deloitte: Credit & Collection Services
• Pricewaterhouse Coopers: How to Improve Account Reconciliation Activities
• Xerox: Plugging a Hidden Profit Drain: Expediting the Resolution of Disputes and Exceptions