What is Accounts Receivable
This is an accounting transaction that deals with the money that is owed by its customers towards the goods and services purchased. These are billing of customers by making a receipt and delivering it to them. The amount to this tune is shown in the balance sheet under the heading Accounts Receivables. Some companies also refer this as trade receivables and categorize them as current assets.
In order to record this transaction the accountant will debit the receivable and credit the revenue account. When this is done it denotes an entry for sale of product or service. When the customer actually pays off the transaction amount cash is debited and receivable is credited. Now a day’s such tedious tasks are done by accounting software. Accounts receivables have a few functions that are very important for the business process.
The primary function of accounting is to enable the company to know clearly what is the financial standing at a given period of time. For this purpose accounts receivables contributes in a better way. Whenever a customer purchases the goods and services of the company it is accounts receivables that keep the billing transactions very clearly. For example if a wholesale customer is given a discount on account of their large volume of order, accounts receivables ensures that this percentage of discount reflects in all the invoices maintained for that purpose.
Accounts receivables are not only concerned with the billing and dispense the same to the customers. It is also responsible for receiving such payments and see that the entries are recorded properly. Accounts receivable should also take care of the old outstanding bills that are not yet cleared; it is for this purpose that accounts receivable posts the payments to the specific invoice. This helps the accounts receivables to recognize the old bills and to send reminders to the clients to ensure timely payments of the same.
Accounts receivables should also work with the accounts payable section in tandem. This is because just as the company expects its customers to make payments on time, the company should also make its payments towards the purchases made. The organization must pay its outstanding bills in a timely manner. Accounts receivable and Accounts payable work together to ensure a smooth functioning of the company and the accounts department. This helps to know the revenue in hand at a given accounting period of time.
However cautiously the accounts receivable may work, sometimes it may not be possible to collect all the debts. Such money is called as Bad Debts; this is finally subtracted from the overall accounts receivable bills. This is done only after the accounts receivable section has tries hard to collect these bills even resorting to collection agencies who help them recover the outstanding bills.