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A Guide to Accounts Receivable

Accounts receivable is a term that is unknown to new business owners or for business owners who have switched their accounting methods from cash to accrual basis.

In the accounting cycle, a very important role is played by accounts receivable services. Your net income is directly affected by your accounts receivable because account receivable is considered as revenue. But your retained earnings are not affected when these accounts receivable are collected as they have already been included in the revenue total once. 

Apart from that, accounts receivable is a permanent account and does not get affected by closing entries. You should always focus on accounts receivable and should prefer consulting accounts receivable outsourcing providers for accounts receivable solutions.

Overview of accounts receivable solutions

Whenever you sell your goods or provide a service to your customer, where the customer promises you to pay the money later, it will lead to the formation of an accounts receivable account in your general ledger. It shows your customers’ amount owed to your business for the goods or services you provide to them on a credit basis.

A business owner needs to manage accounts receivable properly from when the account is created until the balance is received. Keeping track of search accounts can be difficult. Therefore, you can always outsource this work to an accounts receivable service company. They will manage the account properly, and we’ll keep a proper record of everything.

Types of receivables

There are different types of receivable accounts in a business process. Some of those receivable accounts are:

Accounts receivable

An account receivable relationship between a business owner and a lender is created when the business owner provides a service or good to the debtor. It increases the company’s current asset and is mentioned in the general ledger and accounts receivable for the borrower. This transaction is noted so that the debtor’s amount can be credited, increasing the business owner’s asset.

Notes receivable

Notes receivable account is similar to an accounts receivable account. The only difference is the amount of time the debtor can take to repair the amount. The accounts receivable amount is generally payable within two months, whereas on notes receivable account is generally paid after one year and is secured with the promissory note.

Trades receivable

Trade receivables are also similar to other types of accounts receivable. Other types of receivables increase the company’s assets and are noted on improper accounting ledgers. Whereas trade receivables happen when a company sells a product to a customer on credit and gives a specific time limit to the customer to pay the amount back.

Bad debts

There are certain situations in which the debtor becomes insolvent or does not have enough cash flow to pay the amount he owes. The creditor has different accounting options to deal with this situation. When it is clear to the debtor that the amount will not be paid, it can be written off and become a tax deduction.

Examples of accounts receivables

Let us assume that Amrita wants to buy a 30,000 INR vehicle but does not have the whole amount during the time of the sale. The vehicle seller can allow her 30 days to pay the amount. During this time, the seller will record that amount in accounts receivables. The amount will be recorded in sales or cash flow when she pays the amount.

It is an example of an ideal solution. But what will happen if Amrita does not pay the amount in 30 days? The money will still be owed in that case too. It is the reason why accountants record accounts receivable separately from sales. In this case, the company will contact the customer or contact a collection agency to collect the amount. 

One important thing to note here is that the company selling products on credit may not have an actual lien on the property and might not collect the full amount.

The cost of accounts receivable outsourcing

The cost of accounts receivable outsourcing varies from company to company. With all the installation, there is a mix of different one-time fees and recurring fee involved. The one-time fee generally involves professional services, customization, implementation, and setup, whereas the recurring fee includes maintenance and up-to-date reporting in accounts receivable services.

You might have to pay a heavy amount in the beginning for heavy customization if your accounting system is highly customized, intensely manual, or nontraditional. Once implemented, you should look after monthly or recurring costs and ongoing benefits and savings, helping offset the expense.

How are accounts receivable calculated?

It is quite normal to calculate accounts receivable monthly to know the outstanding money status based on the payments that their customers owe them. Below are the steps to calculate accounts receivable:

Adding up all charges:

The first step is to add up the amount that the customers owe them for all the product and services that have been given to customers. These were the purchases that the customer purchased on credit and owed the amount for. Different businesses calculate accounts receivable for a different time duration.

Find the average:

Some companies even want to know the average amount of accounts receivable that they have. It is done by adding accounts receivable and dividing by the number of line items there are. It can also be calculated by the opening balance and closing balance of accounts receivable and dividing it by 2

Calculate net credit sales:

The first step in calculating the accounts receivable turnover ratio is to calculate net credit sales. To calculate the net credit sales, you need to determine the amount of the sales return and allowances from the sales you have made on credit.

Divide net credit sales by average accounts receivables:

Once you have calculated the net credit sales, you need to divide it by average accounts receivable. The ratio this received will give you a better idea about how successful you are at collecting the business’s money.

Wrapping up

Accounts receivable is an important part of business, just like other assets. It should be calculated and recorded properly. It can sometimes be a difficult task to do manually. Therefore, there are accounts receivable outsourcing companies that can help you out by offering best accounts receivable solutions.

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