Handling the financial aspect of your business is plenty of work, especially if you’re not a finance expert. You’ll have to learn many unique terms that provide crucial information about your business. A common term that shows up when treating the financial position of most businesses is Accounts Receivables. Oftentimes, this term is used alongside Accounts Payables. But what really do accounts receivables mean, and how does it work? Keep reading to learn more.
What Are Accounts Receivables?
Simply put, account receivables refer to any actions or transactions that cause an external entity to owe your business money. The money may come from various sources, but the most common source of account receivables is selling goods or rendering services. Other popular sources of account receivables include;
- Any amount earned from insurance policies
- Interest gained from company debts
- Loan amounts and interests received by your company.
Note that only some payments that have been collected qualify as accounts receivables. For instance, some clients may have agreed with your business to pay back after a certain period. You may immediately treat such payments as account receivables or wait until the period has elapsed. However, it’s essential to consult the accounting regulations in your jurisdiction to determine how to go about it.
What’s The Accounts Receivables Process?
The accounts receivables process involves payment collection and tracking. When your business sells or renders a service, the customer may pay immediately or after an agreed period. Accounts receivables will only come to play when the customer defaults on the agreed payment procedure. Businesses that do not require instant payment do well to record all their sales transactions as account receivables. After payment is complete, further accounting treatments may follow.
The first stage of the accounts receivables is to provide invoices to clients. These invoices will inform clients of how much their obligation is. It will also contain essential details, such as customer information and contact details, company information and contact details, the number of goods for the transaction, any previous payments on the invoice amount, and outstanding payments that still exist.
If a client makes a payment on an outstanding amount, it’s essential that you issue a new invoice to indicate this action. This new invoice would contain details about the outstanding invoice amount after deducting the last payment. The issue of new invoices will continue until the payment has been completed. The transaction will be recorded as paid as soon as this payment is completed. It will also be removed as an account receivable.
Certain instances may occur when your company will provide additional services before the outstanding payment is completed. Depending on the accounting policy of your company, you may combine these fees with the outstanding amount or handle the payments separately. You’ll only be able to combine outstanding payments with new payments if they are related to a considerable extent.
What Are The Benefits of Account Receivables Management?
Account Receivables management involves all processes that will allow your company to record all money owed to the company. Proper accounts receivables management will inform you about outstanding payments and streamline money collection. It increases the speed of payment collection and verifies the accuracy of owed balances.
The stages of accounts receivables management will start from keeping records of invoices up to the final collection of owed amounts. The accounts receivables management procedure will ensure that your business has cash readily available to sort all your obligations. You’ll know which customers need to be pressured for payment. You’ll also know which clients to stop servicing or selling to.
And that’s all you need to know about accounts receivables. When running your business, you need to learn about account receivables. There are several important things to note about this financial concept and how it affects your business. This guide has broken down this important concept into relatable points.