What is Accounts Receivable?
When you own a small business, you need to keep track of all the money coming in and going out. A general ledger is a balance sheet that shows the financial status of your business. Accounts receivable is a vital part of small business accounting that plays a critical part in a company's financial success. This asset shows you how much money you have coming in at some point in the near future.
Accounts receivable is the total amount of money owed to a business by its customers for goods or services. When customers receive products or work on credit, the business invoices them, and the amount they owe is added to accounts receivable.
You can easily keep an accurate record of your accounts with Skynova's all-in-one invoicing and accounting software that's specifically designed for small businesses. Learn more about the accounts receivable process, accounts payable, and how Skynova business software can help you today.
What Is Accounts Receivable vs. Accounts Payable?
Larger companies have the luxury of accounting departments, while smaller businesses usually have one person handling it all. As a small business owner, accounts receivable and accounts payable are two accounting terms and practices you need to understand. Accounts receivable is money owed to a business by its customers, who are known as "debtors." On the other hand, accounts payable is money owed by a business to its vendors or suppliers, known as "creditors."
To put it simply, accounts receivable is money your business will receive, and accounts payable is money your business plans to pay. For example, a bakery orders baking supplies from a vendor on credit. The vendor sends the bakery an invoice for the products, and it needs to be paid within 30 days. The amount due is added to the bakery's accounts payable.
The same bakery fulfills a local coffee shop's order every week on a line of credit. The bakery owner invoices the coffee shop on a monthly basis and adds the amount due to their accounts receivable. They expect to receive payment for their goods within 30 days. A company's payment term can be shorter or longer than this 30-day example. If an invoice isn't paid on time, you can adjust the terms on the next invoice, charge late fees, or cease doing business with that customer.
What Is the Accounts Receivable Process?
Recording accounts receivable is simple with Skynova's accounting software. We've designed it so that you can keep accurate records of your income, expenses, sales tax, and payments all in one place online. Let's walk through the accounts receivable process to help you get a better understanding of how it works.
Create a General Ledger
Accountants used to keep handwritten financial records in books called ledgers. However, with modern technology, you can now keep a digital version of your company's balance sheet online. A general ledger is a complete record of a company's financial transactions. The account information within the ledger is used to show:
- Current assets
- Owners' equity
A general ledger is the main repository for storing and organizing your business's financial data, enabling you to generate financial statements.
Ensure bookkeeping accuracy by using double-entry accounting as part of your accrual accounting system. With this method, you create two entries for every transaction to show a complete financial record. Every entry must have an offsetting debit and credit entry to balance the ledger. If you don't have one already, you can create a general ledger today with the help of Skynova's accounting software.
Record the Asset Under Accounts Receivable
All assets need to be recorded under accounts receivable once they've been delivered to ensure an accurate picture of your company's financial status. When using double-entry accounting, an allowance for the total amount of the asset is added to the debit entry column. The account receivable amount is added to the credit entry column. This way, the general ledger is balanced.
Here's a basic example of how to record the asset:
Allowance for uncollectible accounts
Accounts receivable—Keith's Furniture, Inc.
Request and Receive Payment
After an asset has been delivered to a customer and recorded on the general ledger, it's time to request payment. Invoicing is the best way to request and receive payment from a customer in a professional and orderly way. Included within Skynova's accounting software is a free invoice template to help you create accurate invoices in minutes. Other invoicing software features include:
- Sending invoices from the template
- Downloading or printing invoices
- Invoice viewed notifications
- Tracking paid and unpaid invoices
- Accepting online payments
- Recording payments
To get paid faster, be sure to invoice your customers as soon as possible. Also, include payment terms, preferred payment methods, and possible late fee charges on every invoice. This information can help the customer know the invoice's due date and how to pay their bill, like with a credit card. They're also more likely to pay on time to avoid extra fees charged if they don't pay within the collection period.
Whenever you provide goods or services to a customer on credit, there's always the possibility that they won't pay. This inaction results in a bad debt that needs to be resolved within your financial records. If an accounts receivable asset fails to be converted into cash after a year, the amount can then be entered as a long-term asset on your ledger and offset by an allowable amount. Bad debts are also referred to as "doubtful accounts."
If multiple payment reminders and personally reaching out to a customer doesn't resolve negative account balances, you may need to involve a collection agency. On a more positive note, business owners can write off bad debts when they file their taxes each year. It's entered as a deduction on a business income tax return. It may be helpful to create an aging schedule, which organizes your invoices based on how long they've been past due. The schedule can help you sort through outstanding invoices and determine the next step to resolve them.
Does Accounts Receivable Count as Revenue?
Accounts receivable doesn't count as revenue on your general ledger, as it's considered an asset account that's part of your working capital. Even though it's the amount of all your outstanding invoices, accounts receivable is considered a current asset because it measures the liquidity of your business, which is your ability to pay for things without extra cash in the bank.
Once you've received payment for the goods or services you provided, the asset amount is subtracted from accounts receivable. This amount is then added to your cash flow, turning from an asset into revenue. Accounts receivable is good for business because it's an asset that should turn into cash for your company within the short term. Remember that the lower your accounts receivable balance, the better, as it shows that your customers are quickly paying their invoices.
What Is the Accounts Receivable Turnover Ratio?
The accounts receivable turnover ratio is an accounting method that measures a company's effectiveness in collecting money owed by its customers. This information can help you adjust your accounting practices to ensure a better cash flow so that you can pay your bills and make a profit.
How to Calculate the Accounts Receivable Turnover Ratio
It's necessary to calculate the accounts receivable turnover ratio to see how fast your customers are paying their invoices. To find the ratio, you need to divide the total net sales by average accounts receivable. Follow this three-step formula to figure out if your rate is too high or too low:
- Step one: Beginning accounts receivable + ending accounts receivable / 2 = net accounts receivable
- Step two: Net credit sales / net accounts receivable = accounts receivable turnover ratio
- Step three: 52 weeks / accounts receivable turnover ratio = average sales credit period
For example, a general contractor began the year with an accounts receivable amount of $4,000 and ended the year with a balance of $2,000. Step one would be $4,000 + $2,000 = $6,000. Divide this amount by two, and the net accounts receivable is $3,000.
Then, they would take their $60,000 in net credit sales and divide it by $3,000. The contractor's turnover ratio is 20. Finally, they would need to divide 52 weeks by the turnover rate of 20 to determine that the average accounts receivable was collected every two and a half weeks.
Let Skynova Help You Create Your Small Business Income Statements
Skynova's invoicing and accounting software can help small businesses streamline their financial records and get paid faster. Our business templates and software products were made to be as intuitive as possible to help guide you. If you have any questions, rest assured that our knowledgeable support team is always ready to assist you any day of the week. Use Skynova's software to simplify the process of small business accounting today.