What is Accounts Receivable?

Malcolm Tatum
Malcolm Tatum

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. Money owed is known as accounts receivable. Most companies have a department dedicated to this area, and it is responsible for creating and sending bills, receiving and processing payments, and tracking both what money is on hand and what is still due.

Many companies have an accounts receivable department to send bills and process payments.
Many companies have an accounts receivable department to send bills and process payments.

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. An accounts receivable department contributes to the accuracy in part by billing customers for services or goods rendered. Typically, it is this department that keeps up with the billing information and customized billing needs of the client.

A large customer, for example, may receive a percentage discount on monthly goods or services it purchases, based on the volume of business conducted with the company. The accounts receivable staff 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, this department 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, this department is often responsible for receiving payments on those invoices and making sure the money is applied correctly. While some 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 staff members 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. It's important that information about the amount of usable revenue is on hand before payments are made. With that data available, the accounts payable department is able to schedule and make payments on behalf of the company.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Discussion Comments


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