Today, you’ll learn the AR accounting.
Accounts Receivable (AR) accounting is usually one of the bread and butter of a company’s financial operationsIt’s all about keeping tabs on the money that’s owed to us by our customers.
We track everything from sending out invoices to keeping an eye on who’s paid up and who hasn’t.
When someone’s late with their payment, it’s our job to follow up and gently nudge them to settle their bills. We also need to be prepared for the not-so-pleasant task of dealing with potential bad debts.
Our work is critical because it’s what keeps the cash flowing smoothly. We, as accountants and bookkeepers, play a big role in making sure our company’s financial statements are accurate, helping the boss make decisions, and making sure we don’t run into any cash flow hiccups.
It’s a balancing act between getting paid on time and making sure our customers are happy. It’s a bit of a juggling act, but it’s what keeps the financial wheels turning.
In this blog post, we’ll dive into the essentials of AR accounting, exploring its importance and the processes involved, tailored to your role.
1. Invoicing: Your Starting Point
Your journey into AR accounting begins with the creation of invoices. Each time your client provides goods or services, it’s your responsibility to generate an invoice.
These invoices contain crucial details, including the invoice date, the due date for payment, payment terms, and a breakdown of the products or services provided, complete with their respective prices.
2. Customer Records- The Cornerstone of Your Work
To excel in AR accounting, maintaining comprehensive customer records is key. These records should include customer contact information, transaction history, outstanding balances, and the agreed-upon payment terms.
These records serve as your reference point for tracking and managing the financial relationship between the business and its customers.
AR Accounting Entries
Accounts Receivable (AR) accounting involves various accounting entries to record and track transactions related to money owed to a business by its customers. Here are some common examples of accounting entries in AR accounting:
Recording a Sale on Credit, Collection, Factoring and Bad Debts
When a business makes a sale on credit, it recognizes revenue, and the entry might look like this:
| Transaction | Debit | Credit |
|---|---|---|
| Recording a Sale on Credit | Accounts Receivable | Sales Revenue |
| Payment Received from a Customer | Cash or Bank | Accounts Receivable |
| Discounts and Allowances | Sales Discounts (if a discount is granted) | Sales Returns and Allowances (if an allowance is granted) Accounts Receivable |
| Interest Income on Overdue Receivables | Cash or Bank | Interest Income Accounts Receivable (to reduce the overdue balance) |
| Sales Returns | Sales Returns | Accounts Receivable |
| Partial Payment with Write-Off | Cash or Bank (partial payment) | Bad Debt Expense (unpaid portion) Accounts Receivable |
| Transferring Receivables to a Factoring Company | Cash (amount received from the factoring company) | Factored Receivables (to remove them from the balance sheet) |
| Reclassification of Current to Non-current Receivables | Non-Current Assets (e.g., Long-Term Receivables) | Current Assets (e.g., Current Receivables) |
These accounting entries represent the common transactions you may encounter in AR accounting and help maintain accurate financial records for your business.
The journal entries for bad debts use both the allowance method and the direct write-off method.
Here’s a table that separates the two methods:
Allowance Method:
| Date | Account Debit | Account Credit | Description |
|---|---|---|---|
| 01/10/20XX | Bad Debt Expense | Allowance for Doubtful Accounts | Recording estimated bad debt expense based on a percentage of accounts receivable |
| 02/15/20XX | Allowance for Doubtful Accounts | Accounts Receivable | Writing off a specific account that is deemed uncollectible |
| 05/20/20XX | Cash or Accounts Receivable | Allowance for Doubtful Accounts | Recovering a previously written-off account |
Direct Write-off Method
| Date | Account Debit | Account Credit | Description |
|---|---|---|---|
| 01/10/20XX | Bad Debt Expense | Accounts Receivable | Writing off a specific account that is deemed uncollectible |
| 05/20/20XX | Accounts Receivable | Bad Debt Expense | Reversing the write-off of the previously written-off account |
3. Payment Processing: Managing the Inflows
Once customers receive their invoices, it’s up to you to meticulously track incoming payments, ensuring they align with the amounts on the invoices.
Accurate allocation of payments to the respective customer accounts falls under your purview.
4. Aging Reports: Keeping an Eye on Overdue Invoices
Aging reports are your tool for categorizing outstanding invoices based on their due dates. They empower you to monitor overdue invoices and assess how long they’ve remained unpaid.
These reports are invaluable for evaluating the company’s liquidity and the efficiency of its collections process.
5. Collections: Navigating Unpaid Invoices
When an invoice becomes overdue, it’s time for you to initiate the collections process.
This could involve sending payment reminders, making phone calls, or, in severe cases, involving collections agencies to recover the debts.
6. Reconciliation: Your Role in Balancing the Books
Reconciliation is a pivotal aspect of AR accounting. It ensures that the company’s financial records match the payments received.
Any discrepancies or issues must be resolved promptly to maintain financial accuracy.
7. Bad Debt Management: Dealing with Uncollectible Amounts
Unfortunately, some customers may be unable or unwilling to pay their outstanding invoices. You will work with the company to assess and manage these bad debts.
Unrecoverable amounts may need to be written off as losses, with adjustments made to the company’s financial statements accordingly.
8. Reporting: Your Tool for Informed Decision-Making
Prepare regular reports tracking key metrics related to Accounts Receivable.
These reports offer invaluable insights into the company’s financial health, including the average collection period, outstanding balances, and the effectiveness of the collections process.
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