Accounts Receivable; A/R; Accounts Receivable Administration

Accounts receivable is a current asset representing money due for services performed or merchandise sold on credit.  Accounts receivable is usually the largest current asset and often one of the largest assets for any company.

From a credit perspective, accounts receivable administration reflects the credit parameters established for customers, along with a historical summary of the transactions that have taken place. Thus, it may involve customer identifiers, credit limits, credit agency ratings, daily shipping amounts, aging of open items, terms and a payment summary. Quantitative data for reports include number of invoices, checks, credits, discount or other terms violations, short payments and overpayments. The ledger should also contain a summary of order activity along with the impact on the balance due of any orders that have been approved or held but not yet shipped. This will provide an accurate view of the account as it looks when those orders are shipped and billed.

The sum of all customer account balances must agree with the accounts receivable control account in the general ledger. This total reflects the company’s investment in accounts receivable.  As a shipment is made, an invoice is posted to the customer account either manually or as a byproduct of invoicing/billing in an automated system.   Credits and payments are also posted, so at any time the sum of the open items represents the balance due from the customer.

Accounts receivable turnover means the number of times that a company's accounts receivable are created and collected.  This ratio is used to measure the efficiency of credit and collection department and its policies along with the quality of outstanding accounts receivable. From the company's perpective and from the perspective of its creditors, the higher the accounts receivable turnover the better and the lower the turnover, the longer receivables are taking to be collected.

Edited by Michael C. Dennis.  Mr. Dennis is the author of several books relating to credit risk management and commercial collections and he can be reached by email at mcdennis13@yahoo.com