How to Compute Account Receivable
Managing accounts receivable is a crucial aspect of financial management for businesses of all sizes. Account receivable, also known as debtors, refers to the amount of money that a company is owed by its customers for products or services that have been delivered but not yet paid for. Accurately computing account receivable is essential for maintaining a healthy cash flow and making informed financial decisions. In this article, we will discuss the steps and methods to compute account receivable effectively.
Step 1: Understand the Basics
Before diving into the computation process, it is essential to have a clear understanding of what account receivable represents. Account receivable is the sum of all invoices that have been issued to customers but have not yet been paid. These invoices can be for various products or services provided by the company.
Step 2: Gather Invoices and Sales Data
To compute account receivable, you need to gather all the relevant invoices and sales data. This includes invoices issued to customers, credit memos, and any other documents that affect the accounts receivable balance. Make sure to collect data from the accounting software or manual records to ensure accuracy.
Step 3: Calculate the Gross Amount
The first step in computing account receivable is to calculate the gross amount. This involves adding up the total amounts on all the invoices and sales documents you have gathered. The gross amount represents the total amount owed by customers before any deductions or discounts are applied.
Step 4: Deduct Discounts and Allowances
Next, you need to deduct any discounts or allowances that have been granted to customers. This could include cash discounts for early payments or allowances for damaged goods. Subtracting these amounts from the gross amount will give you the net amount owed by customers.
Step 5: Consider Sales Returns and Allowances
In some cases, customers may return products or request allowances due to various reasons. These returns and allowances need to be accounted for in the computation of account receivable. Subtract the total amount of returns and allowances from the net amount to get the final accounts receivable balance.
Step 6: Review and Adjust
After calculating the accounts receivable balance, it is crucial to review the figures and make any necessary adjustments. Double-check the calculations and ensure that all invoices and sales data have been included accurately. This step is essential to maintain the integrity of your financial records.
Step 7: Maintain a Record of Account Receivable
Lastly, it is essential to maintain a record of the accounts receivable balance. This can be done through an accounting software system or a manual ledger. Keeping track of the accounts receivable balance will help you monitor the cash flow and take timely actions to collect outstanding payments.
In conclusion, computing account receivable involves understanding the basics, gathering relevant data, calculating the gross amount, deducting discounts and allowances, considering returns and allowances, reviewing and adjusting the figures, and maintaining a record of the accounts receivable balance. By following these steps, businesses can ensure accurate financial management and maintain a healthy cash flow.
