Account receivable is a term associated with a business that sells goods or renders services to its clients. This arrangement usually allows the company to sell goods or generate services to customers with an agreement that payment will be made at a future date agreed by the business and customer.
However, before a business can create an accounts receivable on its financial position statement, it must have rendered services or sell-out goods to its clients on credit. The details will be stated on the balance sheet helping the company to know the financial health of the business.
Accounts that fall within the confines of accounts receivable
The statement of financial position is key to understanding whether a transaction can be inputted under accounts receivable. These transactions are always on the current asset side of the balance sheet of the business. It is essential to state that any credit transactions that exceed a year do not fall into this category.
Difference Between account receivable and account payable
A business transaction can occur between a business and another business (B2B) or between a company and its customers (B2C). If the business buys on credit from its supplier, such transactions usually fall under account payable (a/p), indicating a company's financial obligation to its supplier either in cash or credit.
To have a better understanding of the relationship that exists between account payable and account receivable, consider a retail store that deals with the selling of flour; when they make purchases for their inventory from their supplier, that transaction is recorded under account payable. But when they sell to their customers, the transaction falls under account receivable, provided their customers did not make full payment.
If the customers make full payment for what they purchase, there will be no point in creating an account receivable account. In essence, a business may have an account payable account and not necessarily have an account receivable account.
Businesses that needs to run on accounts receivable
The critical factor that determines whether a business needs to adopt accounts receivable are numerous. Notable among them are:
The volume of business transactions
Businesses such as oil companies, agro-allied industry, laboratory, medicals firm, etc., usually engage in colossal amounts when it comes to the volume of trade involved. Oil companies that deal offshore can't be run efficiently if payment for their products has to be entered on the ledger daily. Technically, the most efficient way is to accumulate the total of what they produce and sold out monthly, quarterly, or annually.
Imagine a situation where those in the construction industry request daily payment! That sounds awkward. So the only reasonable way to navigate the financial aspect is to adopt the account receivable method as this will reduce the workload usually associated with the construction accounting procedure.
Options against account receivable
Since accounts receivables have to deal with selling out a product or rendering of services with the hope of receiving payment at a future date, the only option for any business that wants to opt for this arrangement is to resort to cash-only basis. On every excellent purchase, the customer must pay the cash equivalent value; the same goes for services.
However, before cash only can be implemented, the business leaders will have to consider such policy's workability because some industries cannot be run on a cash basis.
Categories of receivables
Apart from account receivables, there are other types that we shall be discussing;
This is receivable that can be traced directly to sales from your company. This form of receivable arises from sales made by your company to your customers on credit.
The significant difference between notes receivable and other receivables is the period of payment involved. While other receivables fall within months or a full year, notes receivable can be extended to a year or longer. It is hoped that the small business accounting tips outlined in this article, are of use for those just starting their small business operation.