What is an Accounts Receivable?
Accounts receivable is a business term that refers to the debts and funds owed a company for products or services that have been provided to them. They are shown on an accounting form as a form of assets and can even be bought and sold depending on the type of money owed and the contract that covers the transaction that lead to the account receivable.
How to implement Account Receivables for your business: 4 Steps.
1. Evaluate your companies need for account receivables
The first step in using accounts receivable is to determine the size of your company and how technical you need your accounts receivable to be. For a small business that has a single source of profit generation, accounts receivable will be a very simple concept that can be covered by the business owner if he or she is able to keep a simple account book. Companies with many sources of income may need to hire an employee who handles only accounts receivable and billing issues. This can be very helpful, as it allows the business owner to spend time on running the business, however the costs must always be considered.
2. The importance of a sales ledger
After your evaluation, you will need to keep track of your financial information by using a sales ledger. A sales ledger will document the sales a business has made, the amount of money for those sales, and each monthly total. The sales ledger is the key piece of accounting needed in order to track all sales and income generation your company is creating.
3. Generating billing documents and proper billing for your services or products
The next step is to have the ability to generate billing documents and send them to those who owe during accounts receivable. Billing information can be found throughout the internet or by consulting a business accountant or billing professional. Once established, you must have the ability to send your billing statements to the places of business that owe you funds.
4. The accounting process
Finally, accounts receivable must go through an accounting over a specific time period, with the maximum time being one year, as your business will need to file tax information for the business year with the IRS. Some small business owners may be able to do this on their own if they have experience in accounting, however most will have to have this accounting done by an accounting service provider. This should be a cost all businesses are prepared for, as taxation will be required for every business year. Of course, the costs of accounting work will be highly dependent on how many different types of taxes your business are subject to and how well your accounts receivable have been documented.
Hidden costs of Accounts Receivable
One unfortunate part of business is acknowledging the fact that not every debtor will pay for the goods and services they receive. While this will initiate lawsuits and other legal filings, accountants must take this into account when developing an accounts receivable plan for their business. Of course, good businesses will try to avoid unpaid balances whenever possible, by not doing business with such entities on the brink of insolvency or bankruptcy, but sometimes a company has no choice but to work with them.
Accounts receivable may lead to certain legal issues that need to be turned over to competent transactional lawyers or lawyers with business experience. When a debtor to an account receivable fails to meet the repayment term, legal action may be necessary in order to collect the funds. This can become especially troublesome when the debtor is in a state of bankruptcy or insolvency, as the company that is owed the money may need to enter legal claims as a creditor of the troubled company. Companies should factor in the legal costs and time it may take in order to recover from accounts receivable that are not repaid.
Accounts Receivable: A Short Explanation
An accounts receivable is a claim for money against a debtor which can be an individual, government entity, or business that is against the state. It represents the money that is owed to a company from selling services or products through credit. Commercial borrowers apply value of their receivables and inventory as collateral to secure financing to produce and market their services or products.
There are three qualities that are seen in all accounts receivable claims:
• There is legal authority to bill for the amount that is owed
• Certain calculation methods, a fee schedule, or other methods are used to come up with an amount due
• There is enough documentation to support and enforce the accounts receivable.
In most situations, the accounts receivable is executed through sending an invoice to a customer who then pays the value given within a certain time period. The seller records these payments from the accounts receivable with a sales ledger that describes the sales, money made, and money owed.
When accounts receivables are collected, they will be generally classified as reimbursements, revenue, abatements, or a refund to a reverted appropriation. Accounts receivable prepayments are look at as revenue received in advance unless it is a liability until after the transaction.
Many states have their own statewide accounts receivable program that they use in order to monitor the state’s account receivables and their collection. Using these programs help coordinate systems, information, and procedures within various state agencies.
Furthermore, they help procedures and policies for the collection and managing of different accounts receivable between these agencies. Finally they help compare the procedures and policies of different agencies to see whether they all show consistency within the statewide policies.
In some states, there are contingent accounts receivables the legal obligations are somewhat uncertain, but are more than likely to have a favorable settlement. These situations often include future determination such as a settlement or judgment. They can be reclassified based on how uncertain the accounts receivable or the validity of the accounts receivable.
Legal classifications of an accounts receivable can happen when
• There is not enough sufficient documentation to substantiate the accounts receivable
• There are disputes about the validity
• There is no legal authority for the owed bill
At the end of the year, agencies or departments often have many responsibilities to make sure that all accounts receivable balances are correct. They do this by
• Assessing the owed amounts to the department, such as estimates, and when they expect the amounts to be collected
• Accrual time records for the amounts that are owed but not yet recorded to the government
• Reduce accounts receivable amounts for deferred amounts by recording adjusting entries, these amounts are not expected to be collected