If you’re in the process of establishing a new business, one of your biggest priorities is ensuring all of your finances are in order. A part of this is familiarising yourself with all of the relevant financial terms so that you’re prepared regardless of the streams of funding that you gain. One such term that you might come across is ‘accounts receivable’. At first glance, this term isn’t self-explanatory, so you might be wondering what an accounts receivable is and when you might find your business dealing with one.

That’s why we’ve compiled this handy basic guide to accounts receivable for new businesses so that you can feel completely confident in the event you encounter one.

Basic guide to accounts receivable for new businesses

What is accounts receivable?

Accounts receivable is any form of funds that customers owe your company in exchange for your deliverables, such as a service or product. More specifically, they are funds owed following the invoicing stage. If a deliverable has been ordered and invoiced but not yet paid for, the payment for that deliverable is an accounts receivable.

As a term, accounts receivable is commonly shortened to either AR or A/R, so don’t be alarmed if either of these is used in substitute – they all refer to the same thing.

What is the accounts receivable process?

The process for a traditional accounts receivable is fairly straightforward. Here’s how an account receivable typically occurs and resolves:

1. A customer makes a purchase and is invoiced for the costs.
2. This impending payment is referred to as accounts receivable.
3. The payment is processed and the accounts receivable completed.

Is accounts receivable debit or credit?

Accounts receivable is typically a payment debiting following the issuing of the invoice. This means that you will note down any accounts receivable as a debit transaction as opposed to credit.

There are, however, some situations in which an accounts receivable will instead be considered credited. The most common situation when this will occur is when a deliverable is given to the customer on credit.

Is accounts receivable asset or revenue?

Accounts receivable are commonly seen as an asset as opposed to a stream of revenue for your business. This is because an accounts receivable is an entity that can be converted to cash at a later date if you so choose. In most instances, accounts receivables are listed as current assets as they tend to be paid off in less than a year. This is how you should list accounts receivables on your balance sheet if you need to.

How do you record an accounts receivable?

Like any other form of income or expenditure, you have to record accounts receivables on your balance sheets and anywhere else of note. Luckily, recording an accounts receivable is a straightforward process.

You can record an accounts receivable under the ‘Current assets’ section of your balance sheet. If you have a general ledger instead, the same applies here too.

You should also document your accounts receivable using an invoice. This is for the customer’s benefit as much as it is yours. They get confirmation of how much they’re expected to pay and you gain proof that an exchange of goods with the promise of payment has taken place. Invoicing an accounts receivable is a mutually beneficial process.

What happens if an accounts receivable isn’t paid?

What happens with an unpaid accounts receivable depends on a range of different factors. Any debt that will not be paid by a debtor becomes “accounts uncollectible”, transitioning from accounts receivable into a more doubtful state of repayment. At this point, the company debits the bad debt amount and credits allowance for any doubtful accounts. The most common form of accounts uncollectible are in cases in which a company folds and is unable to pay any outstanding debts, or an individual passes away without being able to pay off their remaining debts to a company.

There are cases in which a living organisation or individual do not pay off accounts receivables. The way that companies resolve this is mentioned below under the potential for legal enforcement. The term “bad debt” is another way of referring to accounts uncollectible, or any debt that a debtor is unlikely to pay back to the company.

Are accounts receivables legally enforceable?

Accounts receivables are legally enforceable claims for payment, which means that in the event of non-payment, there are several different legal routes that lenders have available to them. Companies have the option of using the courts as a means of claiming what is owed to them. This means that, following a series of letters from the courts and a disputes process, bailiffs are involved in the process and collect both goods and money of the equivalent value of the debt. In any case, where accounts receivable are a result of a legally binding contract, unpaid accounts are legally enforceable.

Are accounts receivable transferable?

Accounts receivable are transferable. In the event that a company seeks income in the short term rather than over an extended period of time, they have the opportunity to sell the debt to a third party. Whilst this typically results in receiving a lower sum of money, it is an effective means of making money in the short term. The third party is then responsible for collecting the accounts receivable from the debtor.

How can Draycir help?

Draycir’s software packages offer a range of different tools and options for financial departments, no matter your company’s focus. Credit Hound is one of the most important of these packages for accounts receivable, tracking the various debtors your company has and keeping track of repayments. If you are unable to keep on top of your accounts receivable and want to make sure you’re paid everything you’re owed, try the Credit Hound software today and take a step towards automating your finances. If our basic guide to accounts receivable for new businesses has left you with more questions, a member of our team is happy to help.