These days many business offer, or are obliged to offer, credit terms to their customers. Sales invoices are raised but the expectation is that they will not be paid for a period of time. This period, often known as Terms of Trade, can vary significantly from zero to 180+ days. The value of the amounts remaining unpaid at any time are commonly known as Accounts Receivable or Trade Debtors and the period taken on credit as debtor days or days sales outstanding (DSO).
Accounts receivable values will be found on a balance sheet in the Current Assets section.They are current in that normally the amounts will be received in a relatively short time period.
The management of Accounts Receivable is often critical to managing cash flow and therefore success of the business, so good processes are vital.
It is good practice is to:
When credit terms are offered to customers than in accounting terms we have created an asset for the funds to be received in the future. For example the equations for a £1000 sales invoice on credit would be:
When eventually the invoice is paid by the customer the asset type would move from being an amount receivable to an amount in the bank account but still an asset.
Is it still receivable?
These days unfortunately it is all too common for a customer who was thought to be capable of paying what they owe now not being able to.If nothing is done then the amount they owe will sit on the balance sheet as an asset that in reality does not exist.
It is good practice to regularly review the accounts receivable with a realistic eye and write-off, as a bad debt, any amounts that will not be received.
Most good accounting packages will provide users with reports to help manage the accounts receivable, with reports showing outstanding amounts, the ability to send statements to customers and an analysis of how old (in terms of average days unpaid) outstanding invoices are. This is known as an aged debtors report.
Prepare sales invoices as accurately as possible to avoid any arguments that will delay your customer from paying on the agreed date.
If the business is VAT registered then sales invoices must be in compliant form with compliant information including the VAT Registration Number. Consult a professional advisor if necessary.