When performing the financial side of your small business operations, you'll come across several accounting and bookkeeping terms when making financial reports and balance sheets. One such term is accounts receivable. Often, this term goes hand-in-hand with the phrase accounts payable. However, they are two different financial practices in your business operations.
What are Accounts Receivables?
Accounts receivable refers to an action where your business is owed money. The owed money may come from a variety of sources, yet usually encompasses money owed to you from a customer after you have rendered them goods or services. Other types of money that may fall into the accounts receivable category may include:
- Money obtained from an insurance policy
- Interest garnered from debts owed to the company
- Loan amounts and interest paid to your company
Keep in mind that the payments from customers may not have been collected yet. Some customers and business clients may have a set schedule when they are obligated to make a payment. In these cases, their financial transaction also goes through the accounts receivable process.
Accounts Receivable Process
The accounts receivable method is a payment collection and tracking process. When your business sells a product or service, the customer agrees to make the payment for what is offered. They may pay on the spot or make a contractual promise to pay at a later date.
Your business provides the finished work and they may offer a receipt or invoice for services rendered if the customer makes the payment at the same time. This payment becomes recorded in accounts receivable records.
If the customer does not make a payment at that designated time, your company generates invoices and statements that are sent out. These invoices provide details about the type of transaction offered, the customer's information, the company's information, how much the services or goods cost, any partial payments that have already been received, and the outstanding balance that is still owed.
With every payment received by the customer, your company generates a new invoice with the updated balance amounts. Once the entire balance is paid in full, the transaction is completed.
In some instances, your company may allow the customer to obtain additional services or goods while they are making other payments. These fees may be combined with the outstanding balance that was previously owed and submitted on the same invoice, or the payments may be kept separate if the rendered goods or services differ. Then your company may send out several itemized invoices.
How Does Accounts Receivable Differ from Accounts Payable?
While accounts receivable focuses on payments that are owed to your company, accounts payable encompasses the payments that you may owe.
These payments may deal with services or goods obtained from vendors, business loan payments, rental equipment or building leases, licensing payments, logistical service payments, and other expenses.
Both accounts receivable and accounts payable are found on your balance sheet. Categorizing payments into these two categories allows you to better understand and manage cash flow to see where your money is going.
You can determine discrepancies and promote business growth where your expenses are not more than the payments that your company receives from customers.
Benefits of Accounts Receivable
Having accounts receivable management allows your company to keep track of all payments coming into operations. It allows you to keep customers informed about payments that are due and offers a streamlined collection process.
It speeds up collections and ensures that payments and owed balances are accurate. If the customer has a dispute about what is owed, the accounts receivable department has invoices and a paper trail to use for payment resolution methods.
Accounts receivable processes are a fast method to track payments. In the event that money is tight, your accounting department can evaluate invoices and determine which customers may need a little nudge to send out a payment faster.
It also allows you to halt any reoccurring goods and services offered to the customer until they make reasonable payments to bring their business accounts back into good standing.
