A Quick Guide To Accounts Receivable
Accounts receivable refers to the incoming money owed to a business for products or services, and is a vital part of a company’s balance sheet.
As a business owner, you’ll want to ensure you’re keeping tabs on your pending invoices and assets. To help you learn more about setting up and maintaining your business’s accounts receivable, we defined and outlined the process.
What is accounts receivable?
Your accounts receivable consists of money or credits owed to your company by its customers and clients. It is considered an asset rather than a liability, because it is an amount you are gaining rather than losing.
Accounts receivable is typically tracked with invoices. You issue an invoice to your client, usually after completion of a job, that summarizes the work performed, payment amount, payment terms and due date (e.g., within 30 days of receipt). This allows a company to anticipate incoming credit and identify any late or non-paying customers.
[For more on business accounting, see How Management Accounting Streamlines Your Business Operations.]
Accounts receivable is the flip side of accounts payable, which is a liability or an amount you owe someone else. The money your client owes you would fall under their accounts payable.
Setting up your accounts receivable
There are two standard models of accounts receivable:
- Cash basis accounting, where you’ll record a transaction once a payment is received.
- Accrual basis accounting, where you’ll record it as soon as an invoice is sent out, regardless of when the client actually pays you.
With a few exceptions for special types of income, the IRS generally allows businesses to choose between cash or accrual basis accounting, depending on which suits them best. However, you must stick with your chosen method. If you decide later that you want to switch, you’ll need to get IRS approval.
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