What is accounts receivable and how to manage it

Accounts receivable example with figures

A uniform supplier in Johannesburg delivers R60,000 of uniforms to a school on 30 October. The school will pay in 30 days.

The sale counts as revenue on 30 October. The cash arrives in two parts. Between those dates the money sits in accounts receivable.

Accounts receivable journal entries

Two entries cover most of the AR cycle. One when you invoice and one when the customer pays.

Accounts receivable and accounts payable

Trade receivables is the same idea under another name. It refers to receivables from normal sales, not from loans or other income.

The accounts receivable process step by step

1. Agree the credit terms before the sale. Net 30 means payment within 30 days of the invoice.
2. Issue the invoice the day you deliver. Each day of delay pushes the due date out.
3. Record it in the AR ledger with the customer, amount and due date.
4. Remind the customer before the due date. Most late payments are forgotten, not refused.
5. Record each payment the day it arrives. Match it to the right invoice.
6. Follow up overdue invoices by age. Use the aging report to decide who comes first.
7. Send a statement of account every month to customers with open invoices.
8. Write off what cannot be collected, following your accounting policy.

How to measure accounts receivable

Three numbers tell you if receivables are healthy. Calculate them every month.

Example. A business with R300,000 in AR and R900,000 of credit sales in a 90-day quarter has a DSO of 30 days. Its AR turnover for the quarter is about 3.

Writing off accounts receivable

A receivable is written off when the business decides it will not be collected. The customer may have closed or the amount may be too small to chase.

Most businesses use the allowance method. They estimate doubtful accounts each period and write off against that allowance. Tax treatment of bad debts depends on each country, so check it with your accountant.

Accounts receivable management that works

• Clear terms on every invoice. Due date, amount and how to pay.
• Reminders before the due date, not only after it.
• One channel the customer reads. In India, Nigeria and the Philippines that is often WhatsApp.
• A payment link in every reminder so paying takes one tap.
• Promises to pay recorded with their date and followed up that day.
• A weekly look at the aging report, oldest balances first.

Outsourcing accounts receivable is another path. An outside team or agency runs the follow-up for a fee. Many businesses keep the first 60 days in-house because the customer relationship stays with them.

Accounts receivable on the balance sheet

Accounts receivable is a current asset. It sits on the balance sheet next to cash and inventory because it should turn into cash within a year.

The balance sheet shows receivables net of an allowance for doubtful accounts. The allowance is the share the business expects not to collect.

The allowance usually comes from the aging report. Older balances get a higher expected loss than fresh ones.

The accounts receivable aging report

An aging report splits every open invoice by how many days it is past due. It is the first document to check each week.

Healthy receivables keep most of the balance in the first two rows. When the lower rows grow, reminders are starting too late.

The free AR aging report template does the buckets with formulas. Change the report date and every row updates.

Accounts receivable without accounting software

Many small businesses track receivables in a notebook or a spreadsheet. That works if the sheet has the right columns and someone updates it every week.

Once the sheet passes about fifty customers, the weekly update starts to slip. That is usually the point to move reminders to software.

Accounts receivable and notes receivable

Accounts receivable come from normal sales on credit, with no formal promise beyond the invoice. Notes receivable are backed by a signed written promise to pay, such as a promissory note.

Notes receivable often carry interest and a fixed schedule. They can be turned into a payment plan when an account receivable gets too old.

Five signs your receivables need attention

• The share over 60 days grows two months in a row.
• The same customers appear at the top of the aging report every month.
• Promises to pay are made and missed without a follow-up.
• Your DSO rises while your sales stay flat.
• You learn about a late payment only when cash runs short.

Any one of these is a reason to review terms and start reminders earlier.

How a business that bills every month runs AR

Schools, internet providers, property managers and distributors bill the same customers every month. Their AR is a list that repeats.

Makatea reads that list from Excel or CSV and sends each customer a reminder on WhatsApp and email. When a payment arrives, Makatea records it and the balance updates. Every Monday it emails the summary with who to follow up first. Start free for 14 days with no card.

Sources

• Accounting treatment of receivables follows standard double-entry practice. Check local reporting standards with your accountant.
• Bad debt rules for tax vary by country. Ask your tax adviser before writing off.