Accounts Receivable (AR) refers to the money owed to a company by its customers. This is often referred to as the company’s “trade receivables” and is usually recorded in the company’s balance sheet as a current asset. AR is an important part of a company’s asset structure and cash flow dynamics, as it indicates the total amount that is due to the company in the short-term.
The Cycle of Trade Receivables
The accounts receivable cycle begins with the company selling goods or services to a customer either in full, or with some deferred payment terms. The customer should then receive an invoice for the goods or services, and this payment is eventually collected by the company, regularly through the customer making payments on their account. If the customer fails to provide payment, the company has the right to issue a statement of outstanding amounts due, with the aim of collecting the money owed.
AR Considerations
When dealing with accounts receivable, there are a few key points to consider:
• Monitor account balances: It is important to keep track of each customer’s account balance in order to ensure that payments are received in a timely manner.
• Analyze customer payments: It is also important to analyze customer payment trends in order to get an idea of when these payments are most likely to be received and how much money can be expected.
• Credit terms: It is important to consider the credit terms offered to customers, as this can affect how quickly payments are received.
• Follow up: Following up any outstanding payments that have not been received can be vital for collecting money owed and maintaining good relationships with customers.
Real-world Example
Jones Manufacturing is a company that produces and sells widgets. They recently sold 1000 widgets to Customer A for $10,000. Customer A has been provided with a credit period of 30 days before payment is due. The $10,000 is recorded as accounts receivable on Jones Manufacturing’s balance sheet and the money is expected to be received by the end of the month.
Throughout the month, Jones Manufacturing’s account receivable team keep track of Customer A’s account balance and important dates, such as the payment due date. As the date approaches, they also ensure that follow up has been done, either by phone or email, and customer responses are tracked. Once the payment is received, the money is then moved from the accounts receivable section of the balance sheet to the company’s general account.
Conclusion
In conclusion, Accounts Receivable is the money owed to a company from customers for goods and services purchased. This is a very important part of a company’s asset structure and cash flow dynamics, and it is the responsibility of the company’s accounts receivable team to monitor, track and collect payments in a timely manner. Proper management of accounts receivable can help prevent cash flow issues and ensure good relationships with customers.
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