Accounts receivable for a company means the total money that is due from customers to which goods or services are sold on credit. If a company has sold goods or services to 100 customers in credit, then the total amount due to be received as on the balance sheet date is shown under the head accounts receivable on the balance sheet. Accounts receivable is also referred as company’s debtors.
Accounts receivable is a sub ledger of the general ledger that lists money owed to the company by the customers when goods sold or services rendered on credit. Accounts receivable system or A/R can be maintained manually or automated.
To reduces error in accounting, a computerized system can be used to post transactions and link it to general ledger and sales.
Values in accounts receivable is shown under the head current asset on the balance sheet. Even though these processes are automated, you need to know the steps of recording for better understanding of the system.
In manual system of accounting you have to follow following steps;
- Post each sale transaction to individual customer A/c by crediting sales account and debiting party/customer account.
- Summarized transactions are then posted into appropriate general ledger.
- When payments are received from customers, you need to debit cash/bank account and credit customers’ individual Account.
- In case of a credit memo, you are required to credit the customer and debit sales.
When a customer return an item, we suggest you to first, check the item against the invoice. If quality and other terms and conditions are satisfied, then credit the customer A/c.
By using information recorded in accounts receivable, you can generate various reports to track customers such as debtors aging, liquidity by the number of sales days and debtors turnover. Debtors aging report is prepared based on the aging of debtors. This type of report allows the managers to understand how old the debtors are.
Receivables of a company can increase year on year due to following reasons;
- Company is making more of its sales on a credit basis rather than a cash basis.
- Organisation has lowered its credit standards
- Company has relaxed its collection procedures
- Management has adopted aggressive revenue recognition policy