Key Concepts of Accounts Receivable and Invoicing

accounts receivable

Represents the amount of money customers owe to an individual or company due to purchasing goods or services.

importance of accounts receivable

Selling goods to a customer creates an asset, and many companies sell goods and services on credit, allowing customers to receive the good or service now and pay for it later.

reporting accounts receivable

It is reported as a current asset, with estimates made for the amount unlikely to be collected, which is reported as a credit balance in a related receivable account such as allowance for doubtful accounts.

invoice

A list or report of products and services provided by a company or vendor to a customer, often referred to as a sales invoice.

subsidiary ledger

A ledger used to track transactions found in one type of account in more detail, also known as a subledger.

sales order

A document confirming the purchase of goods and services for the customer, mainly used for managing business workflow and converted into a sales invoice when goods and services are ready to be delivered.

difference between cash sales and sales on account

Cash sales involve the customer paying for a good or service at the time it is received, while sales on account involve the customer receiving the good or service and promising to pay at a later date.

allowance for doubtful accounts

A balance sheet account that reduces the reported amount of accounts receivable, allowing for a more realistic view of how much of the accounts receivable will turn into cash for the company.

direct write-off approach for uncollectible accounts receivable

An entry is not made until a specific account receivable is determined to be uncollectible, with accounts receivable being credited and the bad debt expense being debited.

schedule of accounts receivable

A report that lists all amounts owed by customers, used for bad debt calculation and audit examination to ensure the year-end accounts receivable balance is accurate.

role of the customer file

Tracks all invoices and incoming payments from customers, allowing a business to easily access information regarding a customer at any time.

aging of accounts receivable report

Lists each customer's outstanding balance and sorts the total amount into columns such as Current, 1 to 30 days past due, 31 to 60 days past due, etc., allowing managers to see which customers are behind in their payments.

sale on account

Accounts receivable is debited, and sales are credited.

controlling account

A summary account in the general ledger which contains the grand totals of individual subsidiary journal transactions.

allowance approach for uncollectible accounts

The uncollectible amount is written off by being removed from accounts receivable; allowance for doubtful accounts is debited, and accounts receivable is credited.

contra account

A general ledger account intended to have its balance be the opposite of the normal balance for the account classification.

purpose of a sales invoice

A bill to the customer after a sale has been ordered, representing a financial transaction between the buyer and seller, and indicating the terms of payment.

purpose of terms of payment

Imposed by suppliers to ensure payments are received within a reasonable period of time and can include discount terms, net terms, and end of month terms.

sales return

Occurs when merchandise is sent back by a buyer to the seller/producer, and the value of the goods returned is deducted from the sales revenue.

purchase allowance

A reduction in the buyer's cost of merchandise granted by the supplier due to problems such as shipping the wrong items, receiving the incorrect quantity, or flaws in the goods.

cash flow statement

A financial statement showing how the balance sheet and income statement changes affect the flow of cash, demonstrating the company's liquidity and stability.