Accounts Receivable
What are accounts receivable?
Accounts receivable are the amounts owed to a business by its customers for goods or services already delivered but not yet paid for. They arise from credit sales and are recorded as current assets on the balance sheet.
Accounts receivable are commonly referred to as "sundry debtors" or "trade receivables" in Indian accounting practice. Each customer typically has their own ledger account, and the total across all customer accounts forms the business's accounts receivable balance.
Why are accounts receivable important?
Accounts receivable represent future cash inflows that fund a business's operations, growth, and debt servicing. Tracking receivables accurately is essential for managing cash flow, forecasting collections, and maintaining working capital.
Accounts receivable also indicate the effectiveness of credit and collection policies. High or rising receivables relative to sales may signal collection delays, customer distress, or overly liberal credit terms. Analysing receivables through ageing reports helps identify overdue accounts and reduce bad-debt risk.
How do accounts receivable work?
1. Making the credit sale
The business delivers goods or services to a customer on credit and issues a tax invoice.
2. Recording the receivable
The transaction is recorded by debiting the customer's account and crediting Sales and Output GST. The customer's account balance now reflects the amount owed.
3. Ageing the receivable
The receivable is classified by age (e.g., 0-30 days, 31-60 days, 61-90 days, over 90 days) to monitor payment status and identify overdue amounts.
4. Following up for collection
As the due date approaches or passes, the business sends payment reminders, follow-up emails, or statements of account to the customer.
5. Recording the collection
On receipt of payment, the entry debits Bank or Cash and credits the customer's account, reducing the receivable balance to zero for that invoice.
Example
A software services firm in Pune has three outstanding customer invoices at month-end: ₹2,00,000 due from Alpha Corp (invoiced 15 days ago), ₹1,50,000 due from Beta Ltd (invoiced 40 days ago), and ₹80,000 due from Gamma Pvt Ltd (invoiced 75 days ago).
The firm's total accounts receivable balance is ₹4,30,000. The ageing report shows ₹2,00,000 as current (0-30 days), ₹1,50,000 as 31-60 days, and ₹80,000 as 61-90 days, requiring active follow-up on the older amounts.
During the following month, Alpha Corp and Beta Ltd settle their invoices by NEFT. The firm records both receipts, reducing accounts receivable to ₹80,000. The Gamma Pvt Ltd account remains open and is escalated for further follow-up.
Key points to remember
- Accounts receivable are amounts owed to a business by customers for credit sales not yet collected.
- They are also known as sundry debtors or trade receivables in Indian accounting practice.
- Accounts receivable are recorded as current assets on the balance sheet.
- Each customer typically has a separate ledger account, and the total forms the receivables balance.
- Ageing reports classify receivables by age to identify overdue amounts and manage collection.
- Poorly managed receivables can lead to cash flow issues and eventual bad debts.
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Accounts receivable are amounts owed to a business by its customers, recorded as an asset. Accounts payable are amounts owed by a business to its suppliers, recorded as a liability. Both arise from credit transactions but represent opposite sides of the trade cycle.
Accounts receivable are shown under current assets on the balance sheet. They are typically reported net of any provision for doubtful debts to reflect the amount realistically expected to be collected.
An ageing analysis classifies each receivable by how long it has been outstanding, in bands such as 0-30 days, 31-60 days, 61-90 days, and over 90 days. It highlights overdue amounts and helps prioritise collection efforts.
Yes. When a receivable is unlikely to be collected, such as due to customer insolvency or prolonged default, it is written off as a bad debt and removed from accounts receivable.
No. Input tax credit is linked to purchases (accounts payable side), not sales. On the receivables side, the seller must pay output GST to the government regardless of whether the customer has settled the invoice.
