When a sale is made, unless the customer immediately pays for the product or service, the purchase is set up as an accounts receivable that the customer owes.. Accounts receivable is money buyers owe a company and that is on the balance sheet as a current asset.
The payment terms for a customer are recorded, usually in an automated receivables system. For most companies, the terms are standard. One common standard is "net 30 days," which means that the total outstanding payment is due in 30 days. Most terms include a late payment charge if the invoice is not paid on time. Late payment charges can be a percent of the amount due or a flat late payment fee, or a combination of both.
Based on the terms for an A/R customer, an invoice is created and sent to the customer. Invoices are sent to the customer in advance of the payment due date to give the customer time to make a payment. Many companies print and mail invoices on a weekly basis.
As payments are received, they are recorded and entered into an automated system or recorded manually on a ledger sheet. Payments are applied against the total amount a customer owes, deducted from the amount owed and calculated to show the remaining balance.
Overdue Payment Notice and Reporting
For payments not made after the due date, customers are sent a past-due payment notice.
To provide Accounts Receivable management with information about money owed and not paid, an "aged" accounts receivable report is created. An "aged" report shows total dollars owed by a date range. For example, the report shows a dollar amount that is 30 days past due, 60 days past due and 90 days past due.
The person responsible for projecting the flow of cash into the business uses the Accounts Receivable report and payment application information to show the money collected and when additional payment is due. This information is used to determine funds available to run the business and whether additional funds are needed from financial sources, such as banks for short-term borrowing.
Past-due receivables are followed up on by either the Accounts Receivable department (for smaller companies) or a Collections Department. A collections manager reviews money past due and activity of collectors such as the number of collection calls made and amount collected.
Collections activities can be outsourced to a collection agency if a company chooses not to do collections in house. If in-house collections is not successful, uncollectibles can be outsourced.
Carolyn Gray started writing in 2009. Her work history includes line and staff management in the Finance and Controller's Department of New York Telephone and NYNEX. Gray has a Bachelor of Arts in government from Clark University and a Master of Business Administration from New York University's Stern School of Business in Management and Organization Behavior.