|Accounts Receivable Processing: How to make it efficient
The first accounting class you took in College or High School probably focused on distinguishing between debit and credit line items and defining such things as accounts receivable. Moving in to the world of accounting and record keeping for businesses however, involves more than plugging in one number. If a business is going to be organized and successful they need to be aware of such bps (business process) and how they affect corporate flow and success.
When the sale of a service or good is made to the customer, it must be recorded on the ledger as an inflow of cash if the customer pays upfront, or as an AR (accounts receivable) if this is the preferred method. When an accountant marks an A/R, they must debit the same number to a line item called Sales. Depending on the type of business it is, having high AR's could be common at the beginning of a period/month. If the customer pays on credit, they generally have till the end of that period(s) to pay it back. Having 30, 60 and 90-day periods are common and keeping tabs on this is important for companies so they can keep customers accountable.
Account Receivable Steps
Depending of the size and type of business, the method of accounting may vary but for this blog we will assume that they are large enough to use an accrual basis of accounting.
1. Capture Customer Qualifications:
When we are working with customers we must record their critical information that will help reduce risk. Using some sort of accounting software whether it is Microsoft Excel or a more specific program like QuickBooks from Intuit, we record their name, place of work, the service, charge and basic personal financial information. If the customer is a long-standing customer than every charge we record we periodically make sure has up to date information. For a company whose total value includes A/R knowing your customers is extremely valuable.
Pretty simple. When a customer purchases your good or service, they clear it with the sales representative or directly with the accountant who than inputs this sale. They return to the customer's information or create a new file and credit their account and debit sales to the company ledger.
Right after a sale is made, it is the company's responsibility to bill the customer informing them of their charge. This billing or invoice should be professional, including the company name, logo, contact information, address and the date of purchase. It will outline the service or good provided, the date it was purchased and when payments are due. Each invoice should also include past charges (if any) and potential penalties if the payments are not made in time.
4. Cash receipts
As customers begin to pay off their charges and respond to the invoices, accountants will record this information through cash receipts that simply let the system know the payment has been made. Accounts receivable will be reduced and an addition of cash will occur.
At the end of a period or month, an accounts receivables aging report is compiled that organizes all expected payments by date (generally 30, 60, 90 days) and their likelihood of being paid off. The report is used to account for allowances for bad debt and to help accountants to double check that total accounts receivable are the same on general ledger as the general report. It is also at this time companies update their allowances for bad debt (customers unlikely to pay) by crediting an allowance item and debiting a bad debt expense item. By completing this company's know how much will have to come out of pocket to cover faulty customers.
Important Things to Note
It all starts with having a reliable accounting system and software. With out it, we cannot keep track of incoming cash flows and who owes us money. If we keep solid tabs we can limit things like bad debt that only harms a company. Reliability on the accountant's part is also fundamental, they need to be diligent and consistent; any kink in the system can send a company down a rabbit trail of frustrating reconciliation.
The Future of AR
The automation of the accounting world is a fast coming reality and is rapidly phasing out traditional ways of bookkeeping. When it comes to A/R, technologies such as that provided by SAP, a firm who designs software to combat the tedious task of A/R management is evolving the work place. When a service is completed or good delivered, sales representative records this in to the software, which updates this to the specific customers data. The software now has the duty to send out pre-programmed invoices, notify an accountant of aging accounts and keep track of bad debt. The accountants duties are now cut in half, their only responsibility is to double check the software's progress and aid the in the gathering/presentation of reports on accounts aging. The role of the accountant will soon be manager of accounts, not just tedious worker.