What is Accounts Receivable?

One of the basics of operating a business is having a means for keeping up with the money that is owed by clients as well as maintaining an accurate record of money received from clients that is to be applied to the amounts they currently owe. In order to perform these functions as well as several other tasks, the principle of Accounts Receivable comes into play. Here are some highlights of the functions of Accounts Receivable and why those functions are so important to the life of any business.

The basic purpose of accounting is to ensure that any functioning entity has a concise picture of what is happening financially at any given time. Accounts Receivable contributes to the accuracy in several ways. A common function is the billing of customers for services or goods rendered. Typically, it is Accounts Receivable that keeps up with the billing information and customized billing needs of the client.

For instance, a larger customer may receive a percentage discount on monthly goods or services, based on the volume of business conducted with the company. Accounts Receivable would maintain that discount information as part of that customer’s billing profile, ensuring that all invoices to that client reflect the proper discount. Often, Accounts Receivable has a great deal of input on the look of the invoice, what information is included and how the information is organized.

Along with creating and distributing invoices to customers, Accounts Receivable is often responsible for receiving payments on those invoices and making sure the payments are applied correctly. While some Accounts Receivable departments tend to post a payment to a customer and apply it to the oldest outstanding invoice, it is more common for a payment to be applied to a specific invoice, even if it is not the oldest outstanding invoice for that client. This allows Accounts Receivable to identify aging on older invoices and work with the client to resolve any issues that may be preventing the payment of invoices that are older than the standard terms of payment.

Accounts Receivable also works closely with the Accounts Payable arm of the accounting process. Just as clients are expected to pay for goods and services rendered, so the company is expected to pay outstanding invoices to their vendors in a timely manner. Accounts Receivable supports Accounts Payable in this function by making sure information about the amount of usable revenue is on hand. With that data available, Accounts Payable is able to schedule and make payments on behalf of the company.