About Accounts Receivable
Accounts receivable are important to any business as they directly affect cash flow. A firm cannot survive long without a steady flow of money from operations. Many firms borrow funds based on the balance of accounts receivable, but that can be expensive. Businesses are usually better off by collecting on invoices, improving working capital and cash flows.
Other People Are Reading
-
Accounts Receivable Ledger
-
In accounting, each debtor has its own account, also known as a sub-account within the accounts receivable ledger. For example, if Mr. Smith owes you money, there will be a sub-account named Mr. Smith with all transactions related that to this specific client. Computerized systems allow you to add names, addresses, contact names, notes and phone numbers within each sub-account. When an invoice is set up or a payment is received, the accountant updates the receivable ledger. Invoices increase and payments decrease the balance in accounts receivable. Accountants also often run aging reports to see history of transactions by client, so that is it easy to see who owes you money, how much and for how long, facilitating cash-flow management.
Collections
-
A major concern of business owners is to make sure that invoices are paid up. Many firms only give credit if the client has a favorable payment history. Some businesses employ credit managers, whose jobs are to approve or deny credit, negotiate terms, credit limits and follow up on past-due clients. When payment is received on the receivables, the journal entry is debits cash and credits accounts receivable. In a computerized system, update the sub-account only and the information will flow properly in the general ledger.
-
Bad Debt
-
Usually not all receivables are collected, which requires the creation of bad debt accounts. Many firms estimate bad debt for current receivables as a percentage of open accounts based on prior history. If a business has a history of losing zero percent of sales a year, then this amount is used to make accounts receivable and revenues more realistic. An allowance for a bad debt account is used in the balance sheet, netting against the receivables. A bad debt expense account is also employed to reduce revenue in the income statement.
Ratios
-
Accounts receivable are considered current assets and are used by investors and bankers in ratios to analyze a firm. They often look at liquidity ratios, such as the current ratio (current assets/current liabilities) and quick ratio (cash + accounts receivable + short-term or marketable securities) /current liabilities). Ratios can also be specific to receivables, including receivables turnover (Annual Credit Sales/Accounts Receivable) and average collection period (Accounts Receivable/Annual credit sales divided by 365)
-
