Accounts Receivable Process

What is the Process of Accounts Receivable (AR)?
In the simplest form, accounts receivable or AR refers to the money that a buyer or customer
owes to a company or entity for goods or services rendered. It refers to a line of credit that is
extended by the company for particular time period i.e. unpaid money or outstanding invoices.
In the balance sheet, AR is represented as current assets.
Most companies deal with such credit and collection processes. They may sell goods or provide
services by agreeing on a future due date for payment on an invoice basis. This provides an
opportunity for customers to make payments after they receive the service.
Accounts Receivable Officers usually handle the related work and oversee all the credit that is
extended to clients. AR Officers work in collaboration with clerks, accountants, collection
officers, etc. and perform a wide range of functions including verification of credit records,
classification of debts, posting journal entries, etc.
Manual methods of managing accounts receivable are quite tedious and can only be used for
small businesses. For larger businesses, various accounting programs like Wave, Xero, Zoho
Books, Invoice Ninja, etc. are used.
Accounts Receivable Process:

Accounts receivable process is set up by organizations in order to identify and classify payments
that have been made and payments that are still due. Such processes help to trace and manage
receivables.
The process followed for managing accounts receivable may vary from company to company
depending upon various factors. The four main steps in such processes are explained below:
 Establishment of credit practices: This is the foremost step in an AR process. The

business must first plan and set up certain rules and policies for credit application.
Credit application processes should be determined whereby customers have to fill out
all the required information in order to apply for credit. Credit runs are then conducted
by the business to select customers who are eligible for credit based on their credit
rating. Various other terms and conditions related to such credit sales are also
determined and these play a major role in the AR process. Some of them include credit
limits or amounts to customers, credit duration, early payment discounts, late payment
penalties, etc.
 Creating invoices: Invoices must be prepared and sent to the customer as quickly as
possible. Invoices are documents that contain various information like details about the
product or service provided, the incurred cost, due date for payment, etc. and act as the
primary platform for communication with the client. They must be clear, accurate and
complete in all respects and must be reviewed and followed up frequently. Invoices can
be created either in paper or electronic format or both. Invoices must be sent
immediately after a product(s) has been delivered or a service has been rendered. The
customer initiates the payment process only after they have received their invoice.
 Tracking accounts receivable: Tracking can be done manually or using advanced

softwares. Details about the payments that are overdue and payments that have been
received are analyzed and sorted. Accounts receivable ledgers are used to record
invoices that are due or haven’t been paid. These ledgers are periodically reviewed to
ensure that all payments have been properly posted and accounted for. Monthly
statements that contain a list of all past invoices must also be sent to customers. Such
statements contain the total unpaid balance amount that is due by the customer.
 Accounting for Accounts Receivable: Accountants or collection officers handle this task.
Entries are made in the journal to record sales. Accounting is done for unpaid debts as
well. Receivables are accounted using either cash basis or accrual basis accounting. The
difference between these two types of accounting lies in the fact that revenues are
recorded when cash in received in the case of the former. Accrual based accounting
system, on the other hand, records revenue when the sale happens i.e. before the
payments are received.

Accounts Receivable Process

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Accounts Receivable Process

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What is the Process of Accounts Receivable (AR)?

Accounts Receivable Process:

 Establishment of credit practices: This is the foremost step in an AR process. The

 Tracking accounts receivable: Tracking can be done manually or using advanced

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