What Is the Meaning of Accounts Receivable?

An important aspect of accounts receivable management is the medley of tactics, tools and methodologies a business relies on to sell products and provide services. These tools also touch on the way the organization guarantees that customers will repay on time, prevents bad debt and presses ahead on customer-account periodic audits. In this way management knows what's going on in corporate books and can pay closer attention to clients who could default.

Definition

Accounts receivable, or customer receivables, represent money a company expects from clients after it delivers goods, performs services or does anything else in between that a contract called for. Receivables arise only out of credit transactions because cash-on-delivery deals typically call for immediate remittances or advance payments. If a customer doesn't pay on time, the client's receivable becomes bad debt and ultimately goes into the "accounts to write off" category if corporate credit managers deem the money noncollectable.

Accounting

A corporate bookkeeper follows various guidelines to record accounts receivable, the most important of which include generally accepted accounting principles (GAAP), international financial reporting standards (IFRS) and American Institute of Certified Public Accountants edicts. To post money a customer owes, the bookkeeper debits the client receivables account and credits the sales revenue account. When the patron makes a payment, the bookkeeper debits the cash account and credits the client receivables account to bring it back to zero. In accounting terminology, debiting cash increases money in a company's cellars -- unlike in the banking sector where it means bad news for an account holder. The entries for bad debt recording debit the bad debt account and credit the "allowance for doubtful items" account.

Financial Reporting

Under GAAP and IFRS, accountants classify customer receivables as short-term assets because a company typically expects to receive client payments within a period that doesn't exceed 12 months. This is the cutoff point between short-term and long-term resources, and assets with a useful life spanning several years are referred to as long-term -- or capital -- resources. As operating assets, accounts receivable are integral to a statement of financial position, also called a balance sheet or statement of financial condition. The "allowance for doubtful items" account also is part the latter statement, whereas bad debt expense is integral to a statement of profit and loss.

Staff Involvement

In the corporate context, various personnel comb customer accounts to identify clients in financial distress and those with irregular payment patterns. Credit managers work collaboratively with accounts receivable clerks and financial managers to monitor remittance levels and prevent excessive bad debt levels. This group also reaches out to collection agencies or in-house recovery agents to set proper procedures that will help the business get some receivable money back.

References

• Auburn University: Reporting and Analyzing Receivables
• Ronald R. Tidd, Ph.D., CPA: Accounts & Notes Receivable (PPT)
• Deloitte: IAS 1 Presentation of Financial Statements
• Government of the Northwest Territories: Job Description -- Accounts Receivable Clerk
• Great Sample Resume: Accounts Receivable Clerk Responsibilities and Duties
• Best Job Interview: Accounts Receivable Job Description