What Are the Duties of Accounts Receivable?

Accounts receivable (AR) represents the money a business is owed by its customers for goods or services delivered but not yet paid. It is recorded as a current asset on a company’s balance sheet, signifying a claim for future cash inflows. Effective management of accounts receivable is fundamental to a business’s financial health, directly impacting its liquidity and ability to cover short-term obligations. A well-managed AR process helps ensure stable cash flow, minimizes bad debts, and contributes to overall financial stability and growth. Without a clear understanding of what is owed and when it is due, a business can face liquidity challenges, regardless of its sales volume.

Creating and Issuing Invoices

The initial stage of generating revenue involves creating and distributing invoices to customers. An invoice serves as a formal request for payment for goods or services already provided, acting as a legally enforceable claim. Accuracy and timeliness in this process are important for maintaining positive customer relationships and ensuring prompt payment.

Invoices must include customer details, such as name, address, and contact information, alongside the vendor’s corresponding details. A detailed, itemized list of the goods or services rendered, including quantities, unit prices, and total prices, is necessary. Invoices must clearly state payment terms, such as “Net 30” (payment due within 30 days from the invoice date), and the due date for payment. Payment terms can vary widely by industry, with “Net 30” being a common standard.

Invoices can be generated manually or through accounting software, with automated systems offering increased efficiency and reduced errors. Digital invoicing processes streamline tracking and enhance customer convenience. Clear communication of payment expectations at the outset of a business relationship, often formalized in contracts, helps prevent misunderstandings and encourages timely payments.

Processing Customer Payments

Once invoices are issued, accounts receivable teams focus on receiving and accurately applying customer payments. Businesses handle various forms of payment, including checks, electronic transfers like Automated Clearing House (ACH) or wire transfers, and credit card payments. The accuracy of recording these transactions is important for maintaining precise financial records.

The process of ‘cash application’ involves matching incoming payments to the correct outstanding invoices and customer accounts. This step is fundamental for recognizing revenue, reducing errors in customer accounts, and improving financial visibility. The sooner a payment is accurately applied, the sooner the funds become usable cash, which can then be utilized for operational costs or investments.

Accounts receivable professionals manage situations involving partial payments, overpayments, or unapplied cash. When customers pay multiple invoices at once or provide limited payment details, matching payments can become complex. Efficient cash application systems, often integrated with accounting software, help streamline this matching process, minimizing manual effort and improving accuracy.

Managing Overdue Accounts

A significant duty within accounts receivable involves the proactive management and collection of outstanding balances. Accounts receivable professionals regularly monitor due dates to identify invoices that have become overdue. A primary tool for this is the ‘aging report,’ which categorizes unpaid invoices based on how long they have been outstanding, typically in 30-day intervals (e.g., 0-30 days, 31-60 days, 61-90 days, and over 90 days). This report helps prioritize collection efforts by highlighting the oldest and most problematic accounts.

Communication strategies are employed to prompt payment from customers. These often include sending polite reminder emails before and after the due date, and making phone calls for increasingly overdue amounts. A 2023 survey indicated that late payments average 49% of all business-to-business (B2B) sales, with an average wait of 73 days to collect payment, underscoring the need for consistent follow-up. If payments remain unpaid, businesses may implement late payment penalties or offer early payment discounts, such as a 2% discount for payment within 10 days instead of 30, to incentivize faster collection.

Resolving payment disputes or discrepancies is another aspect of managing overdue accounts. Disputes can arise from incorrect billing, pricing errors, or issues with goods or services delivered. Accounts receivable teams work with customers and internal departments, like sales or customer service, to investigate the root cause of these discrepancies, clarify misunderstandings, and facilitate a mutually agreeable resolution. Prompt resolution of these disputes helps maintain customer relationships and accelerates cash recovery.

Reconciling Records and Reporting

The analytical and oversight duties of accounts receivable involve ensuring the accuracy of financial data and providing insights for strategic decision-making. A core task is reconciling accounts receivable records with the general ledger. This process involves matching internal records of customer transactions, such as invoices and payments, to corresponding entries in the main accounting system. Regular reconciliation verifies the accuracy of receivables, prevents misstatements on the balance sheet, and helps detect errors or potential fraud.

Accounts receivable professionals prepare various reports that offer a detailed view of outstanding balances and collection performance. Common reports include accounts receivable aging reports, which provide a snapshot of how long invoices have been outstanding, and customer balance summaries, which aggregate amounts owed by each customer. Other reports may include collection forecasts and cash flow projections related to receivables, as well as Days Sales Outstanding (DSO) reports, which measure the average number of days it takes to collect payment.

These reports and insights are communicated to management, providing information for financial planning and strategic decisions. Aging reports help assess customer creditworthiness and forecast cash inflows. Accurate and timely reporting allows businesses to identify potential cash flow bottlenecks, optimize collection strategies, and make informed decisions regarding credit policies and operational investments.