Accounts receivable is money owed to your business by your customers for goods and services. In this blog, we'll cover what is considered accounts receivable, what the different types of receivable accounts are, and how it affects cash flow.
Definition of accounts receivable
If your company has payment terms where you supply a service or product for customers and bill them later on credit, you have accounts receivable. Usually, you will send an invoice to the customer who will pay it by a determined due date under whatever credit terms or payment terms you established. On your balance sheet, these are considered a current asset.
What are the different types of receivable accounts?
Receivable accounts can be broken down into a handful of different categories depending on various factors. Breaking down the large umbrella of receivables into these smaller groups makes tracking and organization much more manageable. Here are some receivable examples:
Trade receivables - While very similar to normal accounts receivable, this journal entry is directly related to the total sales made by your company. This category is most common in the B2B sphere and usually is accompanied by an invoice sent at the time of the sale.
Notes receivables - This category organized and records and promissory notes owed to your company. These are legally binding documents that bind the client to pay within a certain time frame.
Vendor receivables - These are simply payments that are going to be received from suppliers. These can be presented through things like promotional discounts or incentives.
Interest receivables - As you gain interest, there is a period of time where you will not have yet been paid. This entry is where you keep track of those upcoming interest payments.
Employee receivables - These are any personal expenses employees may owe the company. These can include things like repayment for damaged equipment, personal travel expenses, or travel advances.
While this list already seems long, there are other categories that receivables can fall under in specific circumstances, such as owner's receivables, insurance claims receivables, or income tax receivables. Depending on your company and how it operates, you will probably end up with a handful of common receivable categories that are common.
How should you categorize accounts receivable?
Accounts receivable, assuming that they are due within the next fiscal or calendar year, are categorized as current assets. They are any money that third parties owe to the company from the sales of services or products that have not yet been paid. Confusingly, these are sometimes shortened to "receivables" A/R. This information is all categorized on a balance sheet showing the details of these transactions.
How does accounts receivable affect cash flow?
Your cash flow statements (CFS) show the total incoming, and outgoing cash flows your company is involved in. It is a mandatory part of the financial reports your company holds. All of your accounts receivable entries have to be shown on your cash flow statements. Remember that because accounts receivable are not cash, the amount of your increased receivables have to be deducted from your net sales. Paid credit amounts, on the other hand, are entered as gains within net sales.
How to measure accounts receivable
There are a handful of different ways to can track and measure your accounts receivable. An important measurement to take advantage of is how quickly bills are being paid, known as your accounts receivable turnover ratio. To calculate this, all you need to do is divide your total net sales by your average accounts receivable. Knowing this information can help you estimate how quickly you can turn your accounts receivables into cash.
Somewhat inverse of the turnover ratio is the receivable to sales ratio. This calculation is your current total accounts receivable divided by its sales over a specific period of time. This data can help you figure out your accounts receivable quality, where a higher ratio can point to risk that you need to address.
It is also common to use a receivable aging schedule. When doing this, you organize your accounts receivable by age to see what bad debt expenses your company may have upcoming. These aging reports are often sorted into different columns in periods of either 15-day or 30-day increments, as well as current items and past due items. By monitoring this schedule, you can adjust any credit policies to help prevent these issues, and you can also calculate the allowance for doubtful accounts.
Finding the right tools
With the many receivables categories and the importance of keeping track of these debts accurately, it is important that you implement the right tools. Technology has evolved to help simplify this process accurately through automation programs such as Routable. We simplify your receivable process by accepting your online payments and sending you real-time payment notifications. Our automation processes also route your invoices, and we also sync directly with your accounting software to make for a seamless experience.
With our automation tools, your team will spend less time on invoicing and will collect their payments faster with flexible payment methods and quick customer onboarding. We also offer accounts payable automation tools to help your team eliminate tedious work and focus on what matters most. To learn more, request a demo.