Accounts Receivable is money owed by entities to your business on the sale of products or services on credit. It is one of the most important functions when running a business. If you don’t have a good functioning Accounts Receivable System then your cash flow will dry up and you will have major financial troubles.
So lets look at a good Accounts Receivable System. The process of Accounts Receivable is as follows:
- Customer Purchases Goods or Services on Credit
- Your Business Issues an Invoice for the Purchase
- Your Trading Terms determine how long the Customer has to pay
- Statements are issued at the end of each month
- If Payment hasn’t been made within Trading Terms Debt Collection may be undertaken
- The Customer Pays for the Goods or Services
- The Payment goes directly into the bank account or into the cash tin for depositing at a later date
Larger Companies have an Accounts Receivable Department who record:
- The Sales their Company has made
- The amount of money received for goods or services
- The amount of money owed at the end of each month
The Accounts Receivable Department is in charge of receiving funds on behalf of the company and applying it towards their current balances.
Small Businesses generally do not have Accounts Receivable Departments, but the person responsible for the overall accounting/bookkeeping still undertakes the same roles.
Customers who purchase Goods or Services on Credit are known as Debtors.
As the Sale is on account your Business needs to offer Trading Terms or Payment Terms. The Debtor (Customer) is free to pay the amount owing before the due date and some Businesses even offer discounts to encourage this to happen.
It is important for someone within the Business to monitor the Accounts Receivable and to immediately follow up with any Debtors who do not pay within those terms.
In order for you to understand the different Trading Terms that you could adopt when setting them, I have created a chart below:
|Credit Term||Brief Description|
|Net 10 Days||The net amount is due within 10 days of the date of the invoice|
|Net 30 Days||The net amount is due within 30 days of the date of the invoice|
|Net 60 days||The net amount is due within 60 days of the date of the invoice|
|Net EOM 14||The net amount is due within 14 days after the end of the month (EOM)|
|Net EOM 30||The net amount is due within 30 days after the end of the month (EOM)|
|Net EOM 60||The net amount is due within 60 days after the end of the month (EOM)|
|2/10, n/30||If paid within 10 days of the invoice date, the buyer may deduct 2% from the net amount; If paid in 30 days of the invoice date, the net amount is due.|
|1/10, n/60||If paid within 10 days of the invoice date, the buyer may deduct 1% from the net amount; If paid in 60 days of the invoice date, the net amount is due.|
In order for you to get paid you must issue invoices to the person who purchases from you. You must make sure that you invoice regularly, either as the purchase occurs, or weekly, fortnightly or monthly. But don’t leave it longer than a month, cash flow will dry up really fast if you do this.
You need to make sure that when a sale is of more than $82.50 (including GST), you need to issue a Tax Invoice so that the purchaser can claim a credit for the GST in the purchase price. If you are asked to supply a Tax Invoice, you must do so within 28 days of their request.
Tax Invoices must include the following information:
- The words Tax Invoice
- The name of the business issuing the Tax Invoice
- The Australian Business Number (ABN) of the business issuing the Tax Invoice
- The date the Tax Invoice was issued
- A brief description of the items sold, including the quantity (if applicable) and the price
- The GST amount (if any) payable – this can be shown separately or if the GST amount is exactly one-eleventh of the total price, as a statement such as ‘Total price includes GST’
If the Tax Invoice is for over $1,000 it needs to also include the Buyers ABN.
Aging of the Accounts Receivable
On your Balance Sheet the Accounts Receivable is only a total figure owing at the time, it does not detail what makes up that figure. To obtain a detailed report of what makes up this figure, most Accounting Programs have a report called Accounts Receivable Ageing Summary Report. This report is useful in determining what Debtors are slow to pay and therefore need attention.
The Ageing Summary Report details each client and the amount they owe. It is divided into categories for current, 30 days, 60 days, 90 days or longer. The report is generated by sorting unpaid sales invoices by customer and then by the date of the sales invoices. The report indicates how much of its Accounts Receivable is past due and how far past due they are.
An example of an Accounts Receivable Ageing Summary Report is as follows:
Local Accounting Firm
A/R Ageing Summary
As of May 30, 2015
|Current||1 – 30||31 – 60||61 – 90||91 and over||Total|
|Local Vet Clinic||0.00||0.00||0.00||0.00||3,840.00||3,840.00|
|Local Takeaway Store||0.00||0.00||0.00||100.00||0.00||100.00|
|Local Carpet Cleaner||0.00||0.00||0.00||0.00||2,733.00||2,733.00|
Over a period of time it becomes obvious that money owed by some Debtors is not going to be recovered and therefore they are going to have to be written off as Bad Debts. It is advisable to write the bad debts off prior to the end of the financial year.
If you need to know more ideas about collecting money, read my blog – 5 tips to successfully collect outstanding money without damaging working relationships