Accounts Receivable

Accounts Receivable (AR) refers to the outstanding invoices a company has or the money clients owe
the company for goods or services provided on credit. These are o en treated as current assets on the
balance sheet. Managing accounts receivable is crucial for maintaining healthy cash flow and ensuring
the business's financial stability.

Key Concepts in Accounts Receivable

Invoicing: The process of issuing invoices to customers a er goods or services have been provided. An
invoice details the amount owed, the due date, and terms of payment.

Payment Terms: These are the agreed terms between the seller and the buyer on when the payment
is due. Common terms include "Net 30," which means payment is due 30 days a er the invoice date.

Aging Schedule: This is a table that categorizes accounts receivable based on the length of me an
invoice has been outstanding. Typical categories might include 0-30 days, 31-60 days, 61-90 days, and
over 90 days. It helps businesses iden fy overdue accounts.

Collec ons: The process of pursuing payment of overdue invoices. This may involve reminders, phone
calls, or engaging a collec on agency for severely overdue accounts.

Allowance for Doub ul Accounts: An es mate of the Number of receivables that a company expects
will not be collected. This is used to present a more accurate picture of the company’s financial
condi on.

Bad Debt: This is an expense recognized when it becomes clear that a receivable will not be collected.
It’s typically wri en off against the allowance for doub ul accounts.

Turnover Ra o: The accounts receivable turnover ra o measures how efficiently a company collects
its receivables. It’s calculated by dividing net credit sales by the average accounts receivable.

Example Process

Sale on Credit: A company sells goods or services to a customer and issues an invoice with payment
terms of Net 30.

Recording the Sale: The sale is recorded as revenue in the income statement and as an accounts
receivable in the balance sheet.

Collec on Efforts: If the customer doesn’t pay within the specified terms, the company might follow
up with reminders and other collec on efforts.

Allowance and Write-offs: If a receivable is deemed uncollec ble, it’s wri en off against the allowance
for doub ul accounts.
Accounts Receivable Process Flow

The Accounts Receivable (AR) process flow outlines the steps involved in managing customer credit
sales, from issuing invoices to collec ng payments.

1. Credit Approval

Step 1: Customer Credit Evalua on

Assess the creditworthiness of new customers through credit checks, references, and historical data.

Set credit limits and terms based on the evalua on.

2. Sales Order Processing

Step 2: Sales Order Crea on

Generate a sales order once a customer places an order, specifying the products or services, quan es,
prices, and agreed payment terms.

Step 3: Order Fulfilment

Fulfil the order by delivering goods or providing services as specified.

3. Invoicing

Step 4: Invoice Genera on

Create and issue an invoice to the customer, detailing the amount due, payment terms, and due date.

Send the invoice through email, postal mail, or electronic invoicing systems.

4. Recording Transac ons

Step 5: Record Sales Transac on

Record the sale in the accoun ng system, increasing accounts receivable and recognizing revenue.

5. Payment Collec on

Step 6: Payment Monitoring

Monitor the due date of invoices to track upcoming payments.

Regularly update the accounts receivable aging schedule to categorize outstanding invoices by age.

Step 7: Payment Receipt

Receive payments from customers via checks, bank transfers, credit cards, or other methods.

Apply the payments to the corresponding invoices in the accoun ng system.

6. Reconcilia on

Step 8: Bank Reconcilia on

Reconcile received payments with bank statements to ensure all payments are accounted for.
7. Follow-Up and Collec ons

Step 9: Reminder No ces

Send reminder no ces to customers for overdue invoices.

Implement a structured follow-up process, including phone calls, emails, and formal le ers.

Step 10: Collec on Ac ons

If payments remain overdue, ini ate collec on ac ons such as engaging a collec on agency or
pursuing legal ac on if necessary.

8. Adjustment and Write-Offs

Step 11: Allowance for Doub ul Accounts

Es mate and record the allowance for doub ul accounts to account for poten al uncollec ble
receivables.

Step 12: Bad Debt Write-Off

Write off bad debts when it’s determined that the receivable is uncollec ble, adjus ng the accounts
receivable and the allowance for doub ul accounts accordingly.

9. Repor ng

Step 13: Financial Repor ng

Prepare financial reports that include accounts receivable data, such as the balance sheet and income
statement.

Analyse accounts receivable turnover ra os and aging schedules to evaluate collec on efficiency and
financial health.
Accounts Receivable (AR)

1. Journal Entries in AR

1. Recording Sales on Credit

Debit Accounts Receivable

Credit Sales Revenue

2. Recording Cash Receipts

Debit Cash

Credit Accounts Receivable

3. Allowance for Doub ul Accounts

Debit Bad Debt Expense

Credit Allowance for Doub ul Accounts

4. Wri ng Off Bad Debts

Debit Allowance for Doub ul Accounts

Credit Accounts Receivable

5. Reversing a Write-Off (Recovery)

Debit Accounts Receivable

Credit Allowance for Doub ul Accounts

2. Invoicing

Invoicing is a cri cal part of the Accounts Receivable process, serving as the official document that
requests payment for goods or services provided.

Invoicing Process

1. Order Confirma on
2. Invoice Crea on
3. Review and Approval
4. Delivery
5. Recording
6. Follow-Up
7. Payment Receipt

Invoice Details

Invoice Number: A unique iden fier for the invoice.

Invoice Date: The date the invoice is issued.

Due Date: The date by which payment is expected.

3. Billing

Billing is a comprehensive process that involves preparing and sending invoices to customers, ensuring
mely payment, and managing accounts receivable.

It’s a cri cal func on for maintaining a company’s cash flow and financial health.

Billing Process

1. Order Verifica on
2. Invoice Prepara on
3. Invoice Approval
4. Invoice Delivery
5. Record Keeping
6. Payment Monitoring
7. Payment Collec on
8. Payment Processing

4. Sales

Sales is a cri cal func on of any business, involving the process of selling products or services to
customers.

It encompasses a variety of ac vi es from lead genera on and customer engagement to closing deals
and a er-sales support.

5. Charge Back

Charge Back is a return of funds to a customer, ini ated by the customer's bank or credit card issuer,
following a dispute regarding a transac on.

Charge Backs are designed to protect consumers from unauthorized or fraudulent charges, but they
can be a challenge for businesses to manage.

6. Refund

Refund is a transac on in which a business returns money to a customer, typically because the
customer is dissa sfied with a product or service, the product is defec ve, or there was an error in the
transac on.

Refunds are an essen al part of customer service and can help maintain customer sa sfac on and
loyalty.

7. Offset

Offset refers to the prac ce of cancelling out or reducing the balance of an account by an equivalent
amount from another account.

This process is o en used to simplify the financial repor ng and to present a more accurate view of a
company’s financial posi on.

Offse ng is typically used in cases where there are reciprocal transac ons or balances.
8. Write-Offs

Write-Offs refers to the process of recognizing that a certain amount previously recorded as an asset
or receivable is no longer expected to be collected or has lost its value, and therefore, it is removed
from the accounts.

This process reflects a more accurate picture of a company's financial condi on by recognizing losses
or asset reduc ons.

9. Reversals

Reversals refers to the process of undoing a previously recorded transac on or entry.

Reversals are typically used to correct errors, adjust entries, or reverse accruals made in a previous
accoun ng period.

10. Credit cards

Credit cards are financial tools that allow cardholders to borrow funds from a financial ins tu on up
to a certain limit to make purchases, pay for services, or withdraw cash.

11. Cash pos ng

Cash pos ng refers to the process of recording and reconciling incoming payments or cash receipts in
a company's accoun ng records.

This process is crucial for maintaining accurate financial records, tracking cash flow, and ensuring that
payments are properly applied to the correct customer accounts.

12. Wire

Wire transfer, o en simply referred to as a "wire," is a method of electronic funds transfer from one
person or en ty to another.

It involves the transmission of money from one bank account to another.

13. Lockbox

Lockbox, also known as a lockbox service or a payment processing lockbox, is a banking service that
allows businesses to streamline the collec on and processing of payments, typically checks, received
from customers.

In a lockbox arrangement, a business establishes a designated mailing address for customers to send
their payments.

Upon receipt, the bank collects, processes, and deposits the payments directly into the business's bank
account.

14. Reduc on of Unapplied and Uniden fied items

Reducing unapplied and uniden fied items is crucial for maintaining accurate accoun ng records and
improving cash flow management.

Unapplied items refer to payments received from customers that have not been applied to specific
invoices or accounts, while uniden fied items are payments that cannot be matched to any exis ng
invoices or accounts.
15. Customer Accounts

Customer accounts refer to individual records maintained by a business to track transac ons, balances,
and interac ons with its customers.

These accounts serve as a central repository of informa on related to each customer's purchases,
payments, outstanding balances, and communica on history.

16. AR to Bank

The process of transferring funds from AR to a bank account typically involves conver ng outstanding
receivables or customer payments into liquid cash that can be deposited into the company's bank
account.

17. AR to GL Accounts

Transferring funds from AR to GL accounts involves recording the receivables received from customers
in the appropriate GL accounts to accurately reflect the financial transac ons in the company's
accoun ng records.

18. Payments

Payments in AR refer to the funds received from customers for goods sold or services rendered by a
business.

Managing payments in AR involves the process of recording, reconciling, and applying customer
payments to outstanding invoices or accounts.

19. Collec ons

Collec ons in AR involve the process of ac vely pursuing and collec ng outstanding payments owed
by customers for goods sold or services rendered.

Effec ve collec ons management is crucial for maintaining healthy cash flow, reducing bad debt, and
op mizing working capital.

1. Aging Analysis
2. Collec ons Strategy
3. Communica on and Follow-Up
4. Payment Arrangements
5. Escala on and Collec on Agencies
6. Record Keeping and Documenta on

20. Cash Applica ons

Cash applica on is the process of matching and applying incoming payments received from customers
to their corresponding invoices or accounts in the accounts receivable system.

This process ensures that payments are accurately recorded, accounts are reconciled, and outstanding
balances are updated accordingly.

1. Receipt of Payments
2. Matching Payments to Invoices
3. Applica on of Payments
4. Accoun ng Entries
21. Accounts Receivable Reconcilia on

Purpose: Accounts receivable reconcilia on verifies the accuracy of accounts receivable balances by
comparing them with suppor ng documenta on such as invoices, payment receipts, and customer
statements.

Process: The company reconciles the total accounts receivable balance with the sum of individual
customer balances, ensuring that all payments received are properly recorded and applied to the
corresponding invoices.

22. Accounts Receivable Turn Over Ra o

Accounts Receivable Turnover Ra o, also known as the "Debtor Turnover Ra o" measures the
efficiency of a company's credit and collec on policies in managing its accounts receivable.

It indicates how many mes during a period the company collects its average accounts receivable
balance.

Accounts Receivable Turn Over Ra o

= Net Credit Sales / Average Accounts Receivable

23. Day Sales Outstanding

Days Sales Outstanding (DSO) is a financial metric that measures the average number of days it takes
a company to collect payment from its customers a er making a sale.

DSO is a key indicator of a company's efficiency in managing its accounts receivable and cash flow.

DSO = AR/Net Credit Sales x Number of Days

24. Resolve open issues

Resolve open issues by addressing it appropriately, be it raising of an invoice or credit notes or

providing necessary clarifica ons, making a request to expedite payments.

25. Ini ate Dunning process

Ini ate Dunning process of sending reminders to client and se ng up calls with the client to expedite
payments.

We can resort to pu ng the account on Credit hold ll the overdue amounts are not cleared.

This means, the client would not be serviced further un l the overdue are cleared.

26. Allowance for doub ul debts

If there is uncertainty or lack of visibility on collectability of some of the aged invoices, it is important
that we make suitable allowance for doub ul debts as per the standard policy of the organiza on.

27. Bad debts

If the client expresses their intent not to pay some of the invoices on account of a financial situa on
or even a dispute, then we might agree to write off these invoices as Bad debts and knock if off from
our AR books.
28. Remi ance

Remi ance Advice iden fiers are ideally Invoice Reference Numbers are included as part of the
Remi ance Advice and it helps us to map against the right customer and invoices.

29. AR Payment Processing

AR payment processing involves recording and managing payments received from customers.

This process ensures that customer payments are accurately recorded, applied to the correct invoices,
and reflected in the financial statements.

30. Payment

Payment modes are Lockbox, ACH and Wire Transfers.

31. Payment mismatches

If there is a short payment, then the invoice is par ally applied.

If there is an excess or duplicate payment, the excess amount is parked as a cash receipt and treated
as Credit.

32. AR Credit Management

AR Credit Management is crucial for maintaining the credit risk of customers and ensuring that the
company's credit policies are effec vely enforced.

This involves monitoring customer credit limits, analysing creditworthiness, and managing credit
exposure.

33. AR Dunning

AR Dunning refers to the process of communica ng with customers to remind them of overdue
payments.

It is a key component of AR management, helping businesses ensure mely collec on of receivables.

34. AR Interest Calcula on

AR Interest Calcula on involves calcula ng and pos ng interest on overdue customer invoices.

This process helps incen vize mely payments and can be configured to comply with a company’s
credit policy.

35. AR Correspondence

AR Correspondence involves genera ng and managing various types of communica on with

customers, such as invoices, payment reminders, account statements, and dunning le ers.

This process helps ensure clear communica on regarding outstanding balances, payment terms, and
overdue amounts, thereby improving collec ons and customer rela onships.
36. Dispute Resolu on

Dispute resolu on in AR involves handling discrepancies or disputes that arise between a company
and its customers regarding invoices, payments, or other related issues.

Efficient dispute resolu on helps maintain customer sa sfac on, ensures accurate accoun ng records,
and improves cash flow.

37. Accoun ng So wares used in AR

1. SAP
2. Net Suite
3. Oracle
4. Quick books
5. Zoho books
6. Xero
7. Wave
8. Copa
9. Great Plains
10. Cargo Wise One

38. SLA

Service Level Agreements (SLAs) for the AR process establish clear expecta ons for performance and
response mes in managing receivables. SLAs ensure mely and efficient handling of various AR
ac vi es, which helps in maintaining cash flow and customer sa sfac on.

Normally, the Turn Around Time (TAT) will be 2 Business Working Days.

39. SAP T Codes

General AR Transac ons:

F-22: Enter Customer Invoice

F-28: Post Incoming Payments

F-32: Clear Customer Account

FBL5N: Display Customer Line Items

FD10N: Display Customer Balances

FBL1N: Display Vendor Line Items

AR Repor ng:

FD10N: Customer Balance Display

FD11: Customer Account Analysis

FD10: Customer Master Data Display

FAGLL03: G/L Account Line Items Display

FAGLL03: G/L Account Balances Display

FBL3N: Vendor Line Items Display

AR Credit Management:

FD32: Change Customer Credit Management

FD33: Display Customer Credit Management

FD34: Display Creditworthiness Informa on

F.31: Display Customer Credit Management

AR Dunning:

F150: Dunning Run

F151: Dunning Proposal

F.27: Dunning History

F.21: Dunning Interest

AR Interest Calcula on:

FINT: Interest Calcula on

F.35: Interest Calcula on for FI

F.36: Interest Calcula on for SD

AR Payment Processing:

F110: Automa c Payment Transac ons

F111: Outgoing Payments

F110S: Automa c Payment Program Configura on

AR Reconcilia on:

F.13: Automa c Clearing

F.32: Clear Customer Account

F.07: Reconcilia on of Receivables

AR Correspondence:

F.64: Correspondence Prin ng

F.63: Correspondence Monitor

F.61: Correspondence: Create

F.62: Correspondence: Change

AR Cash Applica on:

F-28: Post Incoming Payments

F-29: Post Outgoing Payments

F.13: Automa c Clearing

40. Month End Close Ac vi es

Month-end close ac vi es in accounts receivable (AR) involve specific tasks aimed at ensuring the
accuracy of AR balances, verifying the completeness of transac ons, and preparing relevant reports
for financial repor ng purposes.

1. Review AR Aging Report

Generate Aging Report: Produce an AR aging report that categorizes outstanding receivables by the
length of me they have been outstanding (e.g., current, 30 days past due, 60 days past due, etc.).

Analyse Outstanding Balances: Review the aging report to iden fy any overdue invoices or accounts
with outstanding balances, priori zing follow-up ac ons for collec on efforts.

2. Reconcile AR Subledger

Verify AR Balances: Reconcile the total AR balances in the subledger with the corresponding GL
accounts to ensure accuracy and completeness.

Review Customer Accounts: Review individual customer accounts to confirm that all transac ons,
including invoices, payments, credits, and adjustments, are accurately recorded.

3. Review Credit Memos and Adjustments

Verify Credit Memos: Review and approve any credit memos issued to customers for returns,
discounts, or adjustments, ensuring proper authoriza on and documenta on.

Record Adjustments: Make any necessary adjustments to customer accounts, such as write-offs, bad
debt provisions, or reclassifica ons, following company policies and accoun ng standards.

4. Perform Bad Debt Analysis

Assess Bad Debt Reserves: Evaluate the adequacy of the allowance for doub ul accounts and
determine whether any adjustments are necessary based on changes in customer creditworthiness or
historical collec on trends.

Es mate Bad Debt Expense: Es mate bad debt expense for the period, considering factors such as
aging of receivables, past collec on experience, and economic condi ons.

5. Reconcile Payments and Credits

Match Payments to Invoices: Reconcile payments received from customers with the corresponding
invoices, ensuring that each payment is properly applied and recorded.

Verify Credits and Discounts: Confirm that any discounts or credits applied to customer accounts are
accurate and supported by valid documenta on, such as sales contracts or agreements.

6. Prepare AR Aging Analysis

Prepare Management Reports: Generate management reports summarizing AR aging analysis,

including trends, pa erns, and aging categories, for review and analysis by management.

Highlight Key Metrics: Highlight key metrics such as Days Sales Outstanding (DSO), average collec on
period, and overdue balances to assess AR performance and iden fy areas for improvement.
7. Close AR Subledger

Close AR Subledger: Close the AR subledger for the month, ensuring that no further transac ons are
posted or processed a er the cutoff date for the month-end close.

Perform Reconcilia on: Reconcile AR subledger balances with GL accounts, verifying that all
transac ons are properly recorded and accounted for in the financial statements.

8. Document and Archive Records

Document Procedures: Document month-end close procedures, adjustments, and reconcilia ons for
audit trail purposes and future reference.

Archive Reports: Archive AR reports, aging analyses, and suppor ng documenta on in compliance
with regulatory requirements and company policies, ensuring accessibility and security.

9. Post-Close Review

Conduct Post-Close Review: Conduct a post-close review of AR ac vi es to assess the accuracy and
effec veness of month-end close processes, iden fy any issues or discrepancies, and implement
correc ve ac ons for future periods.