Accounts Receiveable 101

Welcome to the wonderful world of consumer credit, payment  collecting, and posting.  This process is known as Accounts  Receivable, and enables you to extend credit to your clients, and  properly track their debts, and payments. The Auto Shop Writer  system simplifies this task to the greatest degree possible, and  should prevent your shop from incurring bad debts.

Most of your clients probably pay by cash, check, or credit card.  These are all really 'cash' payments, because you may convert them  to funds in your bank account with a simple deposit.  You even  receive payment for authorized credit card transactions immediately  upon deposit.

When you personally extend credit to your clients, where they  promise to pay in a given period of time, the debt is known as a  'receivable.'  It is based on the concept that you promise to  provide goods and services now for the promise of a payment in the  future.

These must be tracked carefully, and billed in a timely  manner.  If you follow regular, and clear, billing procedures, you  will not only have fewer bad debts, but you will enjoy a more  positive relationship with your clients.  To ensure proper logging of payments, and credits, your receivables  should be placed on a ledger.

To easily track the status of each  client's debts, the ledgers should be based on individual account listings.  This way, it is possible to view the current credit  extended, and payments, to know exactly what each customer owes.  The charges and payments are also posted to the General Ledger.

When an invoice is charge to an Account Receivable, the amount is  listed as an Asset (debit), and balanced as an Income item (credit).  Further discussion of these terms is provided in the General Ledger  chapter.

When a payment is received, it remains in the Asset  section of the ledger, but simply removes the amount from the  Accounts Receivable, and adds it to the proper method of payment.  With The Auto Shop Writer this is usually the 'cash' account, which is  then dispersed to one of the bank accounts.

During the month, all of the transactions that take place are logged  into the receivables.  This includes all charges, and payments.

At  the end of the month, it is important to send each client a complete  listing of the activity on their  account, which is a statement of  their status.  Although the client has received individual invoices, it is good practice to list a summary of each item on the statement,  and then to provide totals.

There are two types of statements.  The first is balance forward,  which provides a balance total at the beginning of the month, and  then itemizes all of the account activity.   Once the statement is mailed, the month is closed and a new beginning total is obtained.  This is the system used on most 'revolving' charge card systems, ie.  personal credit cards, department store credit, and gas cards.

Small businesses are displaying a preference for the other method of  accounting, known as open item.  Using this method, as an invoice is  paid off, it is removed from the statement.  This is particularly  good when tracking payments.  Many companies now like to pay off  particular invoices with a specific check, and may hold payment on  others for specific reasons.

Accounts Receivables are aged to determine how long credit has been  extended to the client for certain invoices.  Normally, reporting is  provided for 0-29 days, 30-59, 50-89, and 90 plus.  The first period  is the current due, and usually reflects the amount that is being  billed on the statement for the first time.

Amounts in the other  categories may be overdue, depending on the terms of the account.  There are several terms which are standard for payment.  Most of  your clients are probably on a Cash On Delivery basis.  However,  some may have been granted net terms.  This means that they owe the  net amount within a specified amount of time.  Net 10 is quite  common for small company billing.  Most credit cards are due in net  30 days, after which time interest, and late charges, are accrued  (added on).

When accounts exceed the net terms, they become delinquent.  At this  point, the funds need to be collected.  Usually gentle reminders are  all that are needed to obtain payment.  However, repetitive delays  in payment may mean that the client is unable to meet obligations,  and perhaps the debt will remain unpaid.  It is because of this,  that collection procedures may be necessary.

This is a brief summary of Accounts Receivable procedures and terms.  Your local bookstore, or library, may have excellent resources that review, and demonstrate, these principles in great depth.