Lesson 62 - Beginner accounting course

62. What is Accounts Receivable? Managing Customer Invoices

Accounts Receivable (AR) represents money owed to a business by its customers for goods or services sold on credit. It is recorded as a current asset on the balance sheet since the business expects to receive payment within a short period (usually within 30 to 90 days). Managing AR effectively ensures strong cash flow, reduces bad debts, and maintains financial stability.

1. What is Accounts Receivable?

When a company sells goods or services on credit, it allows customers to pay later instead of immediately. The unpaid amount becomes Accounts Receivable, meaning the company is waiting to receive the money.

Example of an Accounts Receivable Transaction:

A business sells products worth €5,000 to a customer on credit with a 30-day payment term. The company records:

When the customer pays after 30 days: 

Once the payment is received, AR decreases, and cash increases. 

2. The Importance of Managing Accounts Receivable

✔ Improves Cash Flow – Ensures a steady inflow of money for business operations.
✔ Reduces Risk of Bad Debts – Helps track overdue invoices and follow up on payments.
✔ Strengthens Customer Relationships – Clear payment terms and reminders build trust.
✔ Enhances Financial Planning – Businesses can predict cash inflows and plan expenses.

3. Accounts Receivable Process: Step-by-Step

Step 1: Extending Credit to Customers

Before selling on credit, businesses should:

• Assess the creditworthiness of customers.

• Set credit limits (e.g., maximum amount a customer can owe).

• Define payment terms (e.g., "Net 30" means payment is due in 30 days).

Step 2: Issuing an Invoice

After selling goods/services, the business sends an invoice detailing:

• Invoice number and date

• Customer details

• Description of goods/services

• Total amount due

• Due date and payment terms

Step 3: Recording the Accounts Receivable

The business records the invoice in its AR ledger and financial statements.

Step 4: Tracking and Following Up on Payments

• Businesses monitor due dates and send reminders for unpaid invoices.

• They may charge late fees for overdue payments.

Step 5: Receiving and Recording Payments

Once the customer pays, the business updates its records, reducing AR and increasing cash.

4. Common Payment Terms in Accounts Receivable 

Offering discounts for early payments encourages customers to pay faster, improving cash flow. 

5. Best Practices for Managing Accounts Receivable

✔ Set Clear Credit Policies – Define payment terms before extending credit.
✔ Invoice Promptly and Accurately – Send invoices immediately after a sale.
✔ Monitor AR Aging Reports – Track overdue payments and follow up regularly.
✔ Send Payment Reminders – Use emails or calls to remind customers of due invoices.
✔ Offer Multiple Payment Methods – Accept bank transfers, credit cards, and online payments.
✔ Consider Factoring or Financing – Sell AR to a factoring company for quick cash if needed.

6. Accounts Receivable vs. Accounts Payable 

Managing both AR and AP efficiently ensures a balanced cash flow and financial stability. 

7. Conclusion

Accounts Receivable is a key asset for businesses that sell on credit. Proper AR management ensures steady cash inflows, reduces bad debts, and maintains strong customer relationships. By tracking invoices, enforcing payment terms, and following best practices, businesses can optimize their financial health.