Accounts Receivable

What it is and what to do about it

Accounts Receivable is a basic accounting concept that refers to amounts that customers owe you from sales made on credit.

A lot of small business retail shop owners have gone to accepting credit cards to get away from having to track and collect these amounts, but many manufacturing and service businesses sell on credit, as their customers are other small businesses, not individuals.

If you do accept credit, get yourself a blank credit application form, these can be purchased at any office supply store, and ask potential customers for some references before extending credit. You want the business, but you want to get paid, too.

Next decide on your credit terms. Most businesses use these:

Net 10 - pay me in 10 days of receiving my invoice

Net 30 - pay me in 30 days of receiving my invoice

Due Upon Receipt - pay me as soon as you get my invoice

Usually these credit terms are pretty standard within industries.

Now you're ready to think about selling on credit.

Basic accounting software systems have invoice templates built into the system, and you can revise it to fit your needs and taste. You can even place your logo on them.

If you're using a manual bookkeeping system, you can either make your own in any word processing package, or you can buy prepackaged preprinted forms at your office supply store. Or you can have your local print shop design some for you.

You can also get shipping forms, if you use them.

In your basic accounting software packages, like QuickBooks, Accounts Receivable is automatically tracked within the software itself, all you do is prepare the invoices and deposit your customer's payments.

But there's something to be said for knowing what goes on behind the scenes.

Here's the process:

Computerized Accounts Receivable Process

**you prepare and mail an invoice to the customer, keeping a copy for your files.

**note: this is automatically posted to the customer's account and your Sales account.

**you receive a check from your customer. You prepare a deposit slip in your computer. The software automatically deducts this amount from that customer's account and adds that amount to your Cash account.

**usually at month-end, you prepare a report called an Accounts Receivable Aging, which shows you each customer and how much they still owe you.

**you can then call customers or send out reminders for amounts that are past due.

For more help on keeping track of who owes you what, click here.


You can also use a manual small business bookkeeping system.

Here's the process:

Manual Accounts Receivable Process

**you prepare an invoice, either in a word processing package or by hand, and mail it to the insured. Keep a copy for your records.

**you enter this sale in your Cash Receipts/Sales Journal Enter the date, invoice number, customer, and amount of the invoice in your journal.

If you are using something like a One-Write system, you can prepare customer statements as you go along.

But you can also track this manually.

To see my system for tracking and collecting Accounts Receivable, click here.

**you receive a check from a customer. Enter the amount received in your Cash Receipts/Sales Journal. For further ease in tracking which invoices are paid and which are not, when a customer makes a payment, look back in your journal and put a check mark next to that invoice entry. Deposit the check.

**At month-end, total up all the columns in your Cash Receipts/Sales Journal. Look back at the invoices without check marks. These are unpaid invoices. Make sure you are tracking these using the system outlined on my collecting Accounts Receivable page.

As you can see, this process can be handled either way, either with your computer or by hand. It all depends on the size of your business and how you like to do things.

Once you have that system down, you may want to forecast out how much money you will be receiving for the next month or two. Maybe you need to see how many bills you can pay next month, or maybe you have a big project coming up. How do you do that? You can prepare a Cash Flow Analysis from your journal and Accounts Receivable Aging Report.

Check out my page on Cash Flow Analysis.

There's a lot of information here, but hopefully once you give it a try it will all come together.