The practice of conducting business on credit terms has long been a part of the commercial trade. Often when two parties agree on doing business the terms and conditions for the same are laid down to ensure a smooth and hassle-free transaction. There are a lot of complex intricacies involved in the business transactions. The ongoing process of business requires terms and conditions that simplify and ease the business transaction.
Understanding Accounts Receivable
The practice of extending credit facility from the seller to the buyer has been an age long practice to help the transaction process and simplify payment terms to avoid the excess financial burden on the buyer. The two parties involved in business transaction often agree on agreed terms of the transaction.
This ritualistic practice of conducting business on credit is based on a mutual trust between the parties which is further made binding by the terms and conditions of the business agreement. It is obligatory that the parties involved in the agreement must abide by the terms of the agreement while conducting business.
The practice of extending credit to the buyer and the buyer’s obligation to pay the creditor in time thus becomes an agreement that must be respected and observed in obedience to the business practice.
When the buyer and seller agree to conduct business on credit after having reached on an agreement and willfully submitting to abide by the terms the transaction is realized. Once the transaction is complete the details of the same is maintained by both the parties.
The seller which is the credit-extending party has transacted goods or services on terms that the payment for the same will be made on a later time within the agreed time-period or the time granted to the party obligated to pay to make the payment.
The details of the amount to be received for the transaction conducted and the time-period within which the payment will be received becomes a record entry for the creditor and is maintained in the accounting books as accounts receivable.
It becomes evidently significant for the creditor to follow-up the accounts receivable as the creditor is bound to receive a payment that is due for the goods and services that has already been provided.
Meaning of Accounts Receivable
As such, accounts receivable can aptly be termed as the cash inflow or the income that is due to be received but has not been realized yet. Accounts receivable is an anticipation of the payment that ought to be received by the credit lending party within the time-period allowed to make the payment.
From the creditor’s point of view, the accounts receivable, thus, becomes significantly noteworthy in making the business transaction successful and establishing a lasting credit relation between the transacting parties.
Accounts Receivable refers to the short-term debt or amount due that is allowed by the buyers to the seller while conducting business on credit. It is, therefore, the monetary proceeds that the seller will receive from the buyer for goods and services that have already been transacted. It is an asset to the organization which is likely to receive the payment proceeds from the other party in business.
The underlying idea behind accounts receivable is the accounts that are maintained to keep an overview of the dues that are to be received from the credit client. It is therefore primarily important to effectively and accurately manage the accounts receivable.
As accounts receivable form a major part of the organization’s asset, it leads to the generation of cash in-flow in the books of the organization. An accurate example of accounts receivable would simply imply a cash inflow that would be realized at a pre-determined time. The entity or individual when provides goods or services to the purchasing party, the credit extended in exchange becomes an asset for the creditor.
This payment that is due to be received from the purchasing party is payable to the creditor and similarly becomes a due receivable for the creditor. The idea behind lending a credit facility to the purchaser is to facilitate and ease the process of the transaction and establish a strong credit relation between businesses. It may lead to better deals or increase the chances of improving the cash inflow in terms of accounts receivable.
It is established that the record keeping of the accounts receivable in the books of the creditor is significantly important to avoid default on the payment due as receivable. It is a strenuous task to maintain an accurate account of the receivable due. It signifies that the company or the credit provider must consider all the necessary steps to manage the process of accounts receivable.
There are four main steps to manage the process as can be summed up as below.
1.Establishing the practice of credit transactions
2.Generating invoices to the customer
3.Tracking the payments received and the payment due to be received.
4.Accounting for the accounts receivable
Let us take a closer look as to how these steps help in managing the process of accounts receivable.
Establishing the practice of credit transactions
Establishing the practice of transacting business on credit is mostly done when the buyer is looking to purchase goods or services on the condition that once the transaction is performed the payment for the same will be made on a later occasion.
This requires the two transacting parties to come to an agreement on the terms and conditions for such credit transaction process. The creditor may verify the credit-worthiness of the buyer to check for the buyer’s ability and willingness to make the payment on agreed terms and condition.
The credit is extended to the buyer for a specific time-period and may attract penalty on default of the credit-payment. The creditor must record the details of the accounts receivable in the record books to establish the credit-relation with the credit buyer. Once the credit-relation is established it would require the transacting party to abide by the terms and the conditions of the credit relation.
2. Generating invoices to the customer
The creditor must due care to ensure the transaction for which the credit is given must be recorded diligently for clear details of the goods and services transacted and the cost of the same. This requires the creditor to generate an invoice to the buyer detailing the cost of the goods or services sold to the buyer.
As the creditor is due to receive the credit due, this account receivable must be recorded as an asset. The credit invoice is then provided to the buyer for to make the payments as per agreed terms.
3. Tracking the payments received and the payment due to be received
The tracking of the accounts receivable requires an accounts receivable officer to track the payment received or due from the buyer. If the payment is received from the buyer, the designated officer needs to track it in the creditor’s receiving bank account and feed the details of the received amount in the accounts receivable system.
This is followed by allocating the details in to the invoice. The payments that are due need to be tracked and followed-up by the officer. The officer needs to refer to the accounts receivable ledger to ensure correctness of the accounting of the credit amount. The buyers are also generated timely statements as a reminder of the credit due as per the current or previous invoices.
4. Accounting for the accounts receivable.
The person managing the accounts receivable must account for the due dates for payments receivable. The timely and prompt management of the accounts receivable may lead to receiving the payments on time from the buyers. Once the account receivable is accounted and payment is received, the account for the said account receivable can be settled for good.
As one walks through the journey of the credit transaction it becomes evidently clear that accounts receivable is an asset that needs precise management from the creditor.
The process of account receivable management, therefore, requires effective and accurate handling to realize the success of the accounts receivable. This adds to the cash inflow of the creditor and results in a successful creditor and buyer relationship
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