Accounts Receivable Cycle

- Eficens Systems LLC

Accounts Receivables
• The accounts receivable cycle starts when a service has been
delivered, but not yet paid for, and is completed when the invoice is
settled, and the amount paid in full.
• Accounts receivable is a necessary step in accounting because
companies will often make arrangments to accommodate different
payment scenarios and credit terms.
• In general, accounts receivable describes the money owed to a
business, after credit is extended to the customer, and the service has
been received. It’s a way of leveraging sales, improving consumer
relationships, and building credit over time.
AR Cycle
• #1) Create a credit application process
• #2) Send invoices to customers
• #3) Establish payment terms and due dates
• #4) Monitoring and reporting
• #5) Recording AR activity
Account Receivables
Process Flowchart
Full Cycle of Accounts Receivable?
• The full cycle of accounts receivable starts at the sale and delivery of
a service to a customer. It ends when that customer is invoiced and
pays the amount owed. Everything in between is important in the
process of ensuring we get paid, on time, with a healthy inflow of
cash.
• The purpose of the accounts receivable cycle is to bring consistent
money into the business from services sold. It works to avoid bad
debt by collecting on invoices before they are past due. This business
process provides a healthy cash flow that supports growth and
profitability.
• Managing the lifecycle of accounts
receivable involves encouraging clients to
pay, sending invoices and payment
reminders, maintaining the trial balance
sheet, and monitoring progress.
• The actual cash collection cycle equates to
the number of days it takes to collect
accounts receivable.
Accounts Receivable Process
1) Create a Credit Application Process

• We as a business wishes to use an Accounts Receivable

ledger and must first set boundaries and definitions when offering
credit.
• We complete the credit application process my signing the MSA (
master service agreement) and other required documents with
the vendors and the clients.
• It’s important that everyone in the business is on the same page.
From sales and marketing to HR and accounting, people should be
aware of what to do to ensure positive cash flows.
#2) Send Invoices to Customers
• Customers who have requested credit for a sale, should anticipate an
invoice next. A business must always stay on top of invoice processing.
All documentation should be sent out as soon as possible to avoid late
payments and outstanding invoices.
• This is a standard practice in any accounting system because customers
are waiting for a final amount before issuing payment. It’s the prolonged
follow-up to a sale after credit has been issued.
#3) Establish Payment Terms and Due Dates
• On the accounts receivable cycle, the next flow is payment from the
customer. The supplier has the ownership to collect the outstanding
payment from the respective client as per the invoice, who purchased
from that supplier.
• As per the indicated terms, the client should make the payment on or
before he due to the supplier.
• All invoices should state due dates in a highly-visible spot so that
customers understand their obligations. Even with stringent terms, AR
may need to paper chase on occasion.
#4) Monitoring and Reporting
• We keep closer track of invoices, the easier accounts receivable
management becomes. Monitoring the age of each invoice is essential
for collections. The “age” is how many days have transpired since the
invoice date.
• Regardless, we have a designated team member assigned to report on
things like
I. Outstanding and past due invoices
II. Recently paid invoices
III. The trial balance sheet
IV. Reconciliation of assets
#5) Recording AR Activity
• The A/R process is not complete without specific accounting actions that
record the payment of invoices and sales. Incoming payments should
always be recorded and each payment will be connected to a specific
invoice number for reference.
• The individual responsible for Accounts Receivable usually updates the
balance sheet, makes adjustments for bad debts, and accounts for
anything unpaid.
• Realistically, in the course of business, some invoices may never receive
payment. Even in these situations, we record the appropriate
information so that each account (including debits, credits, and assets)
represents real-time information.
Prepare a report on aging A/R
• As all we know, accounts are separated by the issued number of
days on the invoice, like
I. From 0 to 30 days
II. From 31 to 60 days
III. From 61 to 90 days
IV. Exceeding 90 days
• This document will also list the customer’s due amount. Once you
update this report regularly, it is easy for you to track before the
bill evolves past due.
Thank you