What is accounts re­ceiv­able ac­count­ing?

Most companies and self-employed people deal daily with customers to whom they supply goods or services. Re­gard­less of whether it is a delivery, a good, or a service: these orders are not always paid for im­me­di­ate­ly after execution. Instead, invoices are written and the ac­count­ing de­part­ment then takes care of managing the out­stand­ing money owed to the business. This is where accounts re­ceiv­able comes in. What exactly does the term mean and what are the tasks of accounts re­ceiv­able ac­count­ing?

The term debtor comes from Latin and simply means a person with debts. In business, you regularly deal with all kinds of customers. They purchase goods or services, and this gives rise to claims; the customer has debts with the supplier and is therefore a debtor. The accounts re­ceiv­able de­part­ment is re­spon­si­ble for managing these re­ceiv­ables.

However, this area of ac­count­ing also deals with can­cel­la­tion invoices (also called credit notes). If, for example, a customer has a credit balance with their supplier due to a delivery that has been the subject of a complaint or an incorrect invoice, the case does not fall into the area of accounts payable. Since it still revolves around the business re­la­tion­ship with a customer, cor­rec­tion invoices – i.e. re­ceiv­ables of the customer from the supplier – are also processed by accounts re­ceiv­able.

The accounts re­ceiv­able balance is comprised of separate account balances for each customer. However, some companies also group different customers together under one customer account. The accounts re­ceiv­able de­part­ment or staff member has the task of keeping these accounts up-to-date to give a true re­flec­tion of the current assets on the balance sheet and for financial analysis, to determine the company’s liquidity.

These accounts can be used to monitor open items (unpaid invoices). As a rule, ac­count­ing software can use no­ti­fi­ca­tions to draw attention to due or overdue re­ceiv­ables, for ease of man­age­ment. In addition, ac­count­ing systems can often be linked directly to the company’s bank accounts and elec­tron­ic account state­ments can be called up. The software then au­to­mat­i­cal­ly posts incoming payments to the correct accounts re­ceiv­able and clears re­ceiv­ables if necessary.

The accounts re­ceiv­able de­part­ment does not just archive business trans­ac­tions, but will also document your re­ceiv­ables, not only so that you can keep track of who is still in debt to you, but also so you can keep an eye on cash flows. It also helps you to better assess future business with your customers.

Re­ceiv­ables man­age­ment and re­ceiv­ables analysis are the two main duties of this side of the balance sheet. Both have a focus on business re­la­tion­ships with the customer in common. These are private in­di­vid­u­als, other companies, or public in­sti­tu­tions to whom the company supplies goods and/or services. If services and money are not exchanged directly – for example in a retail shop – the company issues invoices for them and the customers owe the cor­re­spond­ing amounts until they have been settled.

Re­ceiv­ables man­age­ment (the man­age­ment of open items) is an integral part of ac­count­ing for re­ceiv­ables. Tasks in re­ceiv­ables man­age­ment include, for example:

• Enter and save open items
• Generate and send invoices (on paper or by secure elec­tron­ic trans­mis­sion)
• Register payments from customers and assign them to open invoices
• Mon­i­tor­ing of payment deadlines
• The creation of payment reminders and invoices

One re­spon­si­bil­i­ty of re­ceiv­ables man­age­ment is creating demand for payment letters: An important task to retrieve cash owed to the business is to write dunning notices if customers are in arrears with payments. Payment reminders are used to try and obtain out­stand­ing amounts, but es­ca­lat­ing it to a debt col­lec­tion service or writing off the debt is the next step.

If debtors do not respond to the reminders within a rea­son­able time, the company can employ a debt col­lec­tion agency and, finally, bring the debtor to the small claims court over the dispute.

In addition, the accounts re­ceiv­able de­part­ment can set up man­age­ment payment methods, as well as pro­cess­ing outgoing and incoming payments.

Re­ceiv­ables analysis works with two different types of in­for­ma­tion: On the one hand, you can look at a customer’s out­stand­ing payments, and on the other, the customer’s payment behavior. With in­for­ma­tion about their out­stand­ing payments, the accounts re­ceiv­able de­part­ment can provide in­for­ma­tion on the company’s liquidity. If man­age­ment knows when to expect which payments, it can get in­for­ma­tion about the financial leeway over time and can adjust its planning ac­cord­ing­ly.

In addition, the accounts re­ceiv­able de­part­ment also keeps an eye on the customers them­selves, as mentioned above. In­for­ma­tion about in­di­vid­ual debtors’ payment behavior, but also an analysis of all customers’ general payment behavior provides early in­for­ma­tion about potential risks for the company and possibly within the entire industry. There are also special key ratios for this, like the dis­tri­b­u­tion of sales per customer and per item, the average payment days for accounts re­ceiv­able, the extent of cash discount uti­liza­tion, or trends on days in arrears.

“Aged debtor lists” are an important analysis tool. These are lists that contain the temporal dis­tri­b­u­tion of open items. The aging lists summarize data on the payment behavior and cred­it­wor­thi­ness of customers and group the re­ceiv­ables according to their age from the invoice date or due date – up to 30 days, 30 to 60 days, and so on. Such lists include data like customer credit limits and uti­liza­tion, due dates, and payment overruns. Depending on the company’s product range, these lists can be created according to customer groups, product groups, or other criteria.

Let’s say your company produces and sells plastic parts. A customer ap­proach­es you and would like to order a special part in large quan­ti­ties. Since this is a large order, the first step for accounts re­ceiv­able is to evaluate the customer’s financial situation and payment history. If nothing unusual can be reported from this source, the supply contract can be concluded. It regulates the type of delivery and the deadlines for invoicing and payments: Delivery is to be made “just-in-time” for pro­duc­tion at the customer’s, in each case on all. Partial invoices are sent monthly and payment periods of 30 days are agreed. The accounts re­ceiv­able de­part­ment records and sends the partial invoices and monitors the as­so­ci­at­ed incoming payments.

Since the new customer for this order is not as reliable as before and exceeds payment deadlines, accounts re­ceiv­able writes ap­pro­pri­ate payment reminders and informs the sales de­part­ment about the situation. Their dis­cus­sions with the customer do not initially lead to an im­prove­ment in the situation. For this reason, the accounts re­ceiv­able de­part­ment for­mu­lates a reminder with the threat of a delivery stop. The customer then reacts with ac­cel­er­at­ed payments. The re­ceiv­ables analysis documents the payment dif­fi­cul­ties and saves this in­for­ma­tion for possible further business with the customer.

The opposite sub-area of financial ac­count­ing for accounts re­ceiv­able is accounts payable. While the former deals with re­la­tion­ships between customers, the latter deals with vendors. Accounts payable ac­count­ing can also help the company keep an eye on liquidity. Goods and services are purchased on account and paid using payment terms and cash discounts.

Accounts payable records the level of debt for specific suppliers. Accounts payable and accounts re­ceiv­able together therefore provide a picture of the current financial situation of the company in relation to suppliers and customers – which payments are due when, and which revenues are to be expected when.

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