Accounts receivable is one of an organization’s most important financial health components. Reconciling accounts receivable, meaning comparing a company’s reported sales to its actual cash collections, is essential to maintain accurate records and properly managing cash flow. In this article, we will answer the question: is accounts receivable an asset or liability? And we will also explain how this classification can inform decisions about how best to reconcile them.
What are Accounts Receivable?
Accounts receivable are funds a business has billed but not yet collected from customers. The amount owed by customers may include payments for goods or services that have been delivered or performed before the billing date. For accounting purposes, these amounts are recorded as current assets on the balance sheet until the customer pays them in full. As such, it is generally regarded as an asset rather than a liability since it indicates money owed to the company rather than money the company owes out.
Best Practices for Reconciling Accounts Receivable
1. Analyze Sales Activity:
To begin reconciling accounts receivable, it’s important to analyze sales activity by reviewing invoices and purchase orders associated with each account balance. This helps identify errors or discrepancies between what was sold and what was paid for, allowing businesses to determine if there are any unrecorded transactions or misapplied payments that need attention. Additionally, analyzing historical data can provide insight into changes in payment trends over time so businesses can better anticipate future collections and budget accordingly.
2. Monitor Aging Reports:
A key component of any effective accounts receivable process involves consistently monitoring aging reports – which track unpaid invoices according to their due dates – to keep tabs on delinquent customers and take appropriate action when needed. Businesses should also review new credit applications thoroughly before extending credit terms to minimize their risk of nonpayment while optimizing revenue opportunities at the same time.
3. Establish Clear Policies & Procedures:
Establishing clear policies and procedures around invoice processing is critical for success when reconciling accounts receivable as it ensures consistency throughout the entire process from start to finish while reducing potential problems down the line. Companies should ensure that all documents related to billing and payment activities (e.g., invoices, statements) adhere strictly to company standards; this will help streamline workflow and make it easier for businesses to detect errors quickly if/when they arise during reconciliation efforts later on.
4. Utilize Automation :
Automating certain aspects of the accounts receivable process can be incredibly helpful, both in terms of saving time and money and ensuring accuracy at every stage of the reconciliation process. Automated systems allow companies to easily set up customized rules that govern how information flows through various stages, from invoice creation to collection. In addition, automated solutions enable organizations to not only track and collect payments more efficiently but also reduce the manual effort required to generate reports and identify issues with overdue payments.
5. Consider outsourcing:
When considering outsourcing, organizations should first focus on understanding their internal capabilities & resources before making any decisions about engaging third parties. Depending on their individual needs, some companies may find that it makes financial sense to outsource certain elements of reconciliation tasks; however, other companies may benefit more from taking advantage of specialized software & services offered by external vendors that specialize in managing complex AR operations. Ultimately, the decision between internal and external solutions depends entirely on each organization’s unique requirements and preferences.
6. Use technology wisely:
Technology plays a vital role in the effective management of accounts receivable; however, companies must use technology wisely if they hope to achieve maximum results from their investment in automation/software solutions. Taking the time to consider existing business processes & systems up front will go a long way to ensuring successful implementations later on – minimizing disruption and maximizing returns along the way! Be sure to carefully evaluate features against specific objectives before selecting a particular platform to implement within your organization – doing so will help ensure smooth operations in the future, regardless of the type of solution chosen.
7. Encourage collaboration:
In addition to having the right policies/procedures in place to support the successful implementation of technology solutions, encouraging collaboration across departments also goes a long way in achieving the desired results when reconciling AR balances! Developing a culture of open communication encourages team members to share ideas, and openly discuss challenges faced during reconciliations – leading to greater efficiency, overall results, improved quality control measures implemented within the system itself, allowing teams to work together seamlessly, tackling difficult tasks ahead, achieving common goals smoothly without delay!
8. Keep records up to date:
Last but not least, keeping records up to date is a critical component of successful AR reconciliation! It’s important to document everything related to AR, including physical documents (e.g. invoices), digital files (e.g. emails), and any other relevant materials that could potentially serve as evidence to support claims made during the reconciliation process! Staying organized throughout the process helps to save significant amounts of time, troubleshoot issues, identify errors quickly, prevent unnecessary delays and make reconciliations a much smoother experience for everyone involved!
