What is accounts receivable? A guide for the self-employed

It’s common for businesses to sell goods or services on credit, meaning they deliver them, send an invoice, and get paid a few days or weeks later. The system businesses use to keep track of what customers owe them is called “accounts receivable”.

This guide will help you understand how this process works by covering the following:

• What is ‘accounts receivable’?
• How does accounts receivable work?
• How does accounts receivable impact my business?
• What is the difference between accounts receivable and accounts payable?
• How does accounts receivable processing work?
• How do I get clients or customers to pay me faster?
• Stay on top of accounts receivable with Countingup

Accounts receivable (AR) is the money that individuals or businesses owe you for purchased goods or services. In other words, when you sell something to a customer on credit.

Accounts receivable normally has terms that require your customers to pay the sum within a specific time period. The time frame can range from a few days to a calendar year. Which time frame you choose is completely up to you!

You record your accounts receivable as a current asset (valuable items you intend to sell within a year) on your balance sheet. The balance sheet is a financial document businesses use to record their assets (cash or valuable items), liabilities (money owed, like bills, debts, loans) and equity (the company’s total value). 

Businesses record accounts receivable as assets because the customer is legally required to pay the debt. 

Accounts payable and receivable play a massive role in your company’s cash flow: the money flowing in and out of your business. Late payments have become the norm in many sectors, which causes problems for some small business owners. According to research, 43% of business owners experiencing late payments must rely on overdrafts to meet their monthly obligations.

Managing loads of unpaid invoices can be challenging, especially if you don’t have accounting software that automates some processes. Additionally, waiting for customers to pay could leave you without enough money to pay your financial obligations like bills, rent, or debts. 

An effective accounts receivable process will help you keep track of what’s owed to you. More on this below.

Accounts payable and accounts receivable are essentially two sides of the same coin. Where accounts receivable records money that’s owed to you, accounts payable refers to money you owe other companies or individuals. 

Additionally, accounts receivable is a current asset, whereas accounts payable is a current liability. The reason for this is that your accounts receivable will be converted into cash within a one-year period. By contrast, accounts payable is a current liability since it represents money you owe to others that they can turn into cash within one year. 

However, in cases where you’ve offered longer credit terms, you might record that accounts receivable item as a long-term asset. It’s important to understand the difference between these categories so you can record them correctly in your bookkeeping. Recording your accounts receivable correctly is crucial to getting a clear view into your company’s financial health.

The accounts receivable business process is fairly straightforward. Typically, you follow three main steps when recording an accounts receivable item:

• Send the invoice – After you complete your task or sell your product, you send an invoice to your customer. It’s important to include relevant information like goods or services provided, total amount, customer reference, invoice reference number, company details (yours and your customer’s), and contact details. 
• Track the invoice – Once you send your invoice, keep tabs on it to make sure your customer pays on time. Countingup’s accounting software sends you notifications once you’ve been paid and automatically matches invoices with payments. With automatic invoicing features, the Countingup app can sends you notifications once you’ve been paid and automatically matches invoices with payments.
• Receive payment – When you receive payment, mark the accounts receivable item as ‘paid’ and save the invoice in an “accounts receivable” folder. 

Learn more about processing accounts receivable and accounts payable.

Chasing up late payments from customers can be stressful and time-consuming, so we’ve listed some tips that can help you get paid faster:

The first step to getting paid on time is to establish a clear set of rules for when and how your customers should pay you and enforce them. Sometimes you may be tempted to loosen the rules to secure a sale, especially if business is slow. However, loosening the rules is a short-term fix that will likely only lead to customers getting sloppy with their payments. 

Make it crystal clear when and how you accept payments, and stick to your policy –– even if customers make a fuss. Ask for upfront deposits on large orders or jobs, and list the negative consequences for your customer if they don’t pay on time. For example, by adding interest payments after a certain date. Finally, don’t be afraid to stop working with customers who consistently pay you after the deadline. You deserve customers who take you seriously and respect your need to get paid on time.

Another way to inspire customers or clients to pay you early is to give them a financial incentive for doing so. For example, you could offer a discount on invoices paid within half the total credit time. So, if your customer has a month to pay their debt to you but pays it within 14 days, they get a few percent knocked off the price. 

Offering discounts for early payments can help you get paid faster and lower your customer’s costs, so it’s a win-win.

Simply getting on the phone and reminding your customer or client about a payment is often enough to get them to pay it. Another way to jog your customers’ memory is to send them regular email reminders. 

Countingup makes it easy to create and send professional invoices in seconds. The app automatically numbers your invoices and matches them for accounting purposes when they are paid, too. 

The Countingup business current account, you can manage all your financial data in one place. The app comes with free built-in accounting software that allows you to send invoices on the go.

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!

Download the Countingup app to apply for your business current account in minutes. All you need is proof of ID and a selfie. Download the app here.