{"id":3837,"date":"2020-11-24T13:53:06","date_gmt":"2020-11-24T08:23:06","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=3837"},"modified":"2025-02-13T17:42:38","modified_gmt":"2025-02-13T12:12:38","slug":"what-is-accounts-receivable-definition-process","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/","title":{"rendered":"Accounts Receivable: All You Need to Know"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">A<\/span><span style=\"font-weight: 400;\">ccounts receivable (AR) can positively boost the overall profitability of a business, provided that dealings are done with reliable customers while enforcing specific terms. <\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">No doubt, there\u2019s a risk factor in credit-based transactions. But, the benefits they bring to a long term relationship with the customer can\u2019t be ignored.<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">Read on as we dig deeper into the Accounts Receivable definition, process, and more.<\/span><\/p>\r\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69d6e9db0f2da\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d6e9db0f2da\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#What-is-Accounts-Receivable\" >What is Accounts Receivable<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#Importance-of-Accounts-Receivable\" >Importance of Accounts Receivable<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#Accounts-Receivable-process\" >Accounts Receivable process<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#Step-1-Set-up-credit-practices\" >Step 1: Set up credit practices<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#Step-2-Create-invoices\" >Step 2: Create invoices<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#Step-3-Track-received-and-pending-payments\" >Step 3: Track received and pending payments<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#Step-4-Perform-accounting-for-AR\" >Step 4: Perform accounting for AR<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#Track-your-Accounts-Receivable-effectively\" >Track your Accounts Receivable effectively<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#Higher-vs-lower-Accounts-Receivable\" >Higher vs lower Accounts Receivable<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-accounts-receivable-definition-process\/#Automate-your-money-movement-with-RazorpayX\" >Automate your money movement with RazorpayX<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What-is-Accounts-Receivable\"><\/span><span style=\"font-weight: 400;\">What is Accounts Receivable<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\r\n<p><span style=\"font-weight: 400;\">Accounts Receivable is the amount owed to a business for its products or services which are sold on credit. These credits are usually for a short period and are vital to every business. They can be listed under current assets on the balance sheet.<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">These entries will come in handy especially during audits to assess the revenue that the business has generated.<\/span> <span style=\"font-weight: 400;\">This holds some amount of risk as well, which is why businesses tend to give out their products and services on credit only to other businesses that they trust.\u00a0<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">Accounts Receivable helps build trust and strong credit relationships with customers. It also helps with determining the future cash flow of the business and can be shown as the collection capabilities of the business to any investor.<\/span><\/p>\r\n<h2><span class=\"ez-toc-section\" id=\"Importance-of-Accounts-Receivable\"><\/span><span style=\"font-weight: 400;\">Importance of Accounts Receivable<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\r\n<p><span style=\"font-weight: 400;\">Accounts Receivable needs to be managed efficiently for it to positively make an impact on your business. Here\u2019s why.<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">AR allows regular and reliable customers to make consolidated payments, which reduces <a href=\"https:\/\/razorpay.com\/learn\/what-are-transaction-costs\/\">transaction costs<\/a> when compared to a number of small payments.<\/span> <span style=\"font-weight: 400;\">It also helps in increasing sales as it establishes a lasting working relationship with your customer.<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">AR provides a clearer image of a business\u2019s profitability. Add up all of your assets, including accounts receivable, and deduct your total accounts payable, or liabilities, to calculate profitability. <\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">The business is profitable if the amount is positive.\u00a0<\/span> <span style=\"font-weight: 400;\">If it is negative, then decisions on how to increase the assets or decrease the liabilities must be made.<\/span><\/p>\r\n<h2><span class=\"ez-toc-section\" id=\"Accounts-Receivable-process\"><\/span><span style=\"font-weight: 400;\">Accounts Receivable process<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\r\n<p><span style=\"font-weight: 400;\">There are four main steps to establish a typical AR process.<\/span><\/p>\r\n<ol>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Set up credit practices<\/span><\/li>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Create invoices<\/span><\/li>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Track received and pending payments<\/span><\/li>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Perform accounting for AR<\/span><\/li>\r\n<\/ol>\r\n<p><span style=\"font-weight: 400;\">As smaller businesses look to scale up, AR transactions tend to increase. The AR process not only helps in increasing accounting efficiency but also helps to create discipline while accounting for receivables.<\/span> \u00a0<\/p>\r\n<h3><span class=\"ez-toc-section\" id=\"Step-1-Set-up-credit-practices\"><\/span><span style=\"font-weight: 400;\">Step 1: Set up credit practices<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\r\n<p><span style=\"font-weight: 400;\">A business develops a credit application process which helps in determining if a customer is creditworthy. These terms include credit duration and interest in case of a delay in payment.<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">The whole process of availing credit should be informed to customers beforehand. Businesses should set a viable credit duration. The repayment tenure should not hamper business liquidity and profitability in the long term.\u00a0<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">Since smaller businesses tend to have a lower cash flow, it is advisable for them to define shorter credit durations.\u00a0<\/span><\/p>\r\n<h3><span class=\"ez-toc-section\" id=\"Step-2-Create-invoices\"><\/span><span style=\"font-weight: 400;\">Step 2: Create invoices<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\r\n<p><span style=\"font-weight: 400;\">An invoice containing all the information pertaining to the sale is created. It should have details such as products or services sold, the sale price of these products or services, GST rate applicable to such goods or services and the time duration for repayment.<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">It is advised that these invoices be created and sent to the buyer quickly. The longer it takes for the invoice to be sent, the longer it takes for the payment to be processed. Being prompt here is critical.<br \/><br \/>To find out how much GST you must pay for your goods or services, simply use an <a href=\"https:\/\/razorpay.com\/gst-calculator\/\" target=\"_blank\" rel=\"noopener noreferrer\">online GST calculator<\/a>.<br \/><\/span><\/p>\r\n<h3><span class=\"ez-toc-section\" id=\"Step-3-Track-received-and-pending-payments\"><\/span><span style=\"font-weight: 400;\">Step 3: Track received and pending payments<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\r\n<p><span style=\"font-weight: 400;\">Generally, businesses have an AR\/finance team whose job is to track AR payments. The officer dispatches invoices and follows up on the payments regularly.\u00a0<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">Once the payment is made, it is immediately entered into the AR ledger. This documentation eliminates any confusion regarding the account.<\/span><\/p>\r\n<h3><span class=\"ez-toc-section\" id=\"Step-4-Perform-accounting-for-AR\"><\/span><span style=\"font-weight: 400;\">Step 4: Perform accounting for AR<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\r\n<p><span style=\"font-weight: 400;\">The AR\/finance team tracks sales in a journal and calculates unpaid debt and early payment discounts. <\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">This information is then passed on to debt collectors and audit teams to be entered in financial statements.<\/span><\/p>\r\n<h2><span class=\"ez-toc-section\" id=\"Track-your-Accounts-Receivable-effectively\"><\/span><span style=\"font-weight: 400;\">Track your Accounts Receivable effectively<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\r\n<p><span style=\"font-weight: 400;\">It is extremely important to track Accounts Receivable as there are high chances of not billing a customer, giving away the products or services for free.\u00a0<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">Here are 5 tips to effectively track your accounts receivable.<\/span><\/p>\r\n<p><b>Communicate<\/b><span style=\"font-weight: 400;\">: Make sure to keep a track of pending payments and communicate with the creditor. Businesses that fail to communicate about pending payments within 60 days, tend to lose those payments.<\/span><\/p>\r\n<p><b>Create a fool-proof internal process: <\/b><span style=\"font-weight: 400;\">Stay on top of your AR by creating an internal process to track and pursue creditors. Assign one day in a week to create, print, and mail invoices, and follow up on pending invoices the next day. This will create a continuous schedule which will help both the creditors and your business.<\/span><\/p>\r\n<p><b>Confirm payment receipts<\/b><span style=\"font-weight: 400;\">: Make sure to send payment receipts while closing any receivable. This will help build your relationship with the creditor, and establish that all dealings are professional and well-documented.<\/span><\/p>\r\n<p><b>Establish moderate terms for creditors<\/b><span style=\"font-weight: 400;\">: Businesses can extend a credit line for its customers. This can curb the risk factor in such transactions and also help with understanding both parties better. By sticking to the credit line, customers can establish their reliability and companies can also keep a check on all receivables.<\/span><\/p>\r\n<p><b>Document everything<\/b><span style=\"font-weight: 400;\">: It is imperative that a business documents all the terms of the accounts to help bookkeepers with weekly or monthly inputs on their financial statements. Additionally, the documentation will come in handy if any legal pursuits appear.<\/span><\/p>\r\n<p><span data-sheets-root=\"1\" data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Related Read: What are the Legal Documents Required for Starting a Business?&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:332799,&quot;3&quot;:{&quot;1&quot;:0},&quot;4&quot;:{&quot;1&quot;:2,&quot;2&quot;:14277081},&quot;5&quot;:{&quot;1&quot;:[{&quot;1&quot;:2,&quot;2&quot;:0,&quot;5&quot;:{&quot;1&quot;:2,&quot;2&quot;:0}},{&quot;1&quot;:0,&quot;2&quot;:0,&quot;3&quot;:3},{&quot;1&quot;:1,&quot;2&quot;:0,&quot;4&quot;:1}]},&quot;6&quot;:{&quot;1&quot;:[{&quot;1&quot;:2,&quot;2&quot;:0,&quot;5&quot;:{&quot;1&quot;:2,&quot;2&quot;:0}},{&quot;1&quot;:0,&quot;2&quot;:0,&quot;3&quot;:3},{&quot;1&quot;:1,&quot;2&quot;:0,&quot;4&quot;:1}]},&quot;7&quot;:{&quot;1&quot;:[{&quot;1&quot;:2,&quot;2&quot;:0,&quot;5&quot;:{&quot;1&quot;:2,&quot;2&quot;:0}},{&quot;1&quot;:0,&quot;2&quot;:0,&quot;3&quot;:3},{&quot;1&quot;:1,&quot;2&quot;:0,&quot;4&quot;:1}]},&quot;8&quot;:{&quot;1&quot;:[{&quot;1&quot;:2,&quot;2&quot;:0,&quot;5&quot;:{&quot;1&quot;:2,&quot;2&quot;:0}},{&quot;1&quot;:0,&quot;2&quot;:0,&quot;3&quot;:3},{&quot;1&quot;:1,&quot;2&quot;:0,&quot;4&quot;:1}]},&quot;9&quot;:0,&quot;10&quot;:1,&quot;11&quot;:3,&quot;12&quot;:0,&quot;15&quot;:&quot;Calibri&quot;,&quot;19&quot;:0,&quot;21&quot;:0}\">\u00a0 <a href=\"https:\/\/razorpay.com\/learn\/business-documents-startups-india\/\">Related Read: What are the Legal Documents Required for Starting a Business?<\/a><\/span><\/p>\r\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528ff0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/?r=blog_cta_business_banking_accounts_receivable&amp;utm_source=blog&amp;utm_medium=cta\" target=\"_blank\" rel=\"noopener noreferrer\">Automate your Money Movement<\/a><\/div>\r\n<p>&nbsp;<\/p>\r\n<h2><span class=\"ez-toc-section\" id=\"Higher-vs-lower-Accounts-Receivable\"><\/span><span style=\"font-weight: 400;\">Higher vs lower Accounts Receivable<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\r\n<p><span style=\"font-weight: 400;\">Higher AR indicates that the business has poor collection methods and is having a tough time converting sales into cash. <\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">Cash crunch might increase a business\u2019s working capital requirement, which will lead to an increase in short term borrowings. <\/span> <span style=\"font-weight: 400;\">These borrowings carry a high-interest burden affecting profitability.<\/span><\/p>\r\n<p><span style=\"font-weight: 400;\">However, lower AR implies that a business can easily receive cash from its customer and can use this cash for day-to-day operations. This allows the business to improve its cash flow, productivity and liquidity.<\/span><\/p>\r\n<p style=\"text-align: center;\"><strong>[Suggested Read &#8211; <a href=\"https:\/\/razorpay.com\/blog\/e-book-the-complete-guide-to-closing-the-financial-year-for-startups\/\" target=\"_blank\" rel=\"noopener noreferrer\">A 7-step checklist to help you wrap up FY 2020-21 error-free]<\/a><\/strong><\/p>\r\n<h2><span class=\"ez-toc-section\" id=\"Automate-your-money-movement-with-RazorpayX\"><\/span><span style=\"font-weight: 400;\">Automate your money movement with RazorpayX<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\r\n<p><span style=\"font-weight: 400;\">RazorpayX is an end-to-end business banking platform that automates your entire money movement.\u00a0<\/span><\/p>\r\n<ul>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Make 24*7 instant outgoing payments to vendors, customers, &amp; employees<\/span><\/li>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Automate bank transfers &amp; customer refunds without bank details<\/span><\/li>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Track your business\u2019s cash flow in real-time with your smart Dashboard<\/span><\/li>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Create approval workflows with advanced permission controls<\/span><\/li>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Pay your vendors, contractors, employees, and more, in one click<\/span><\/li>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Add beneficiaries and transact without waiting periods<\/span><\/li>\r\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Manage your entire money movement from one central hub<\/span><\/li>\r\n<\/ul>\r\n<p><span style=\"font-weight: 400;\">Experience business banking like never before!<\/span><\/p>\r\n\r\n<p>&nbsp;<\/p>\r\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528ff0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/x.razorpay.com\/auth\/signup?r=blog_cta_business_banking_accounts_receivable&amp;utm_source=blog&amp;utm_medium=cta\" target=\"_blank\" rel=\"noopener noreferrer\">Automate your Money Movement<\/a><\/div>","protected":false},"excerpt":{"rendered":"<p>Accounts receivable (AR) can positively boost the overall profitability of a business, provided that dealings are done with reliable customers while enforcing specific terms. No doubt, there\u2019s a risk factor in credit-based transactions. But, the benefits they bring to a long term relationship with the customer can\u2019t be ignored. Read on as we dig deeper<\/p>\n","protected":false},"author":151156458,"featured_media":3841,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3437],"tags":[],"class_list":{"0":"post-3837","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-banking"},"_links":{"self":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/3837","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/users\/151156458"}],"replies":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/comments?post=3837"}],"version-history":[{"count":11,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/3837\/revisions"}],"predecessor-version":[{"id":15848,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/3837\/revisions\/15848"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media\/3841"}],"wp:attachment":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media?parent=3837"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/categories?post=3837"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/tags?post=3837"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}