How to Record Accounts Receivable?
1. Invoice Generation: When a sale is made on credit, the business generates an invoice detailing the transaction, including the customer’s name, billing address, invoice number, date, description of the goods or services sold, quantities, prices, and terms of payment.
2. Posting to the General Ledger: The invoice is recorded in the accounting system by debiting the accounts receivable account and crediting the sales revenue or service revenue account. This entry reflects the increase in accounts receivable and the recognition of revenue associated with the sale.
3. Customer Ledger: A separate customer ledger or subledger may be maintained to track individual customer accounts. Each invoice is posted to the respective customer’s account, along with any payments received or adjustments made.
4. Aging of Accounts Receivable: Accounts receivable aging reports are generated periodically to track the status of outstanding invoices and categorize them based on the length of time they have been outstanding. This helps identify overdue accounts and prioritize collection efforts.
5. Payment Application: When customers make payments, the payments are recorded in the accounting system by debiting the cash or bank account and crediting the accounts receivable account. Each payment is applied to the appropriate customer account to reduce the outstanding balance.
6. Reconciliation: Regular reconciliation of accounts receivable is performed to ensure accuracy and completeness. This involves comparing the accounts receivable balance in the general ledger to the total of individual customer account balances in the customer ledger.
7. Adjustments and Write-Offs: If a customer disputes a charge or fails to pay an invoice, adjustments may be made to the accounts receivable balance to reflect the revised amount owed. In cases where it is deemed unlikely that a customer will pay, bad debts may be written off as an expense, reducing the accounts receivable balance.
8. Reporting: Accounts receivable data is used to generate financial reports such as the balance sheet, income statement, and cash flow statement. Key metrics such as days sales outstanding (DSO) and accounts receivable turnover ratio provide insights into the efficiency of accounts receivable management and overall financial performance.
Contact Us