What is accounts receivable accounting?

Most companies and self-employed people deal daily with customers to whom they supply goods or services. Regardless of whether it is a delivery, a good, or a service: these orders are not always paid for immediately after execution. Instead, invoices are written and the accounting department then takes care of managing the outstanding money owed to the business. This is where accounts receivable comes in. What exactly does the term mean and what are the tasks of accounts receivable accounting?

Accounts receivable and accounts payable: a definition


The accounts receivable department is in place to organize and process the receivables of a company from its customers. This includes entering and sending invoices, assigning payments, tracking due dates, demanding payment letters and collections, as well as doing the corresponding accounts analysis.

The term debtor comes from Latin and simply means a person with debts. In business, you regularly deal with all kinds of customers. They purchase goods or services, and this gives rise to claims; the customer has debts with the supplier and is therefore a debtor. The accounts receivable department is responsible for managing these receivables.


Business accounts usually contain a subledger, which rolls up into the general ledger. The accounts receivable subledger, for instance, contains all of the credit sales to customers, each customer's remittance, returns of merchandise, discounts, and so on. Other examples are accounts payable, which deal with business payment obligations, payroll accounting, inventory accounting – basically any money owed to suppliers/vendors.

However, this area of accounting also deals with cancellation invoices (also called credit notes). If, for example, a customer has a credit balance with their supplier due to a delivery that has been the subject of a complaint or an incorrect invoice, the case does not fall into the area of accounts payable. Since it still revolves around the business relationship with a customer, correction invoices – i.e. receivables of the customer from the supplier – are also processed by accounts receivable.


In common usage, the cancellation of an invoice or a reduction of the invoice amount is often referred to as a credit note. In fact, the document in question should have the title “Correction invoice.” In contrast, a credit note in business terminology is legally an invoice issued not by the supplier of goods or services, but by its recipient. This is possible if it has been agreed beforehand between the business partners. In addition, the recipient may object to a credit note.

Focus on customer accounts

The accounts receivable balance is comprised of separate account balances for each customer. However, some companies also group different customers together under one customer account. The accounts receivable department or staff member has the task of keeping these accounts up-to-date to give a true reflection of the current assets on the balance sheet and for financial analysis, to determine the company’s liquidity.

These accounts can be used to monitor open items (unpaid invoices). As a rule, accounting software can use notifications to draw attention to due or overdue receivables, for ease of management. In addition, accounting systems can often be linked directly to the company’s bank accounts and electronic account statements can be called up. The software then automatically posts incoming payments to the correct accounts receivable and clears receivables if necessary.

Tasks of accounts receivable

The accounts receivable department does not just archive business transactions, but will also document your receivables, not only so that you can keep track of who is still in debt to you, but also so you can keep an eye on cash flows. It also helps you to better assess future business with your customers.

Receivables management and receivables analysis are the two main duties of this side of the balance sheet. Both have a focus on business relationships with the customer in common. These are private individuals, other companies, or public institutions to whom the company supplies goods and/or services. If services and money are not exchanged directly – for example in a retail shop – the company issues invoices for them and the customers owe the corresponding amounts until they have been settled.

Receivables management

Receivables management (the management of open items) is an integral part of accounting for receivables. Tasks in receivables management include, for example:

  • Enter and save open items
  • Generate and send invoices (on paper or by secure electronic transmission)
  • Register payments from customers and assign them to open invoices
  • Monitoring of payment deadlines
  • The creation of payment reminders and invoices

One responsibility of receivables management is creating demand for payment letters: An important task to retrieve cash owed to the business is to write dunning notices if customers are in arrears with payments. Payment reminders are used to try and obtain outstanding amounts, but escalating it to a debt collection service or writing off the debt is the next step.

If debtors do not respond to the reminders within a reasonable time, the company can employ a debt collection agency and, finally, bring the debtor to the small claims court over the dispute.

In addition, the accounts receivable department can set up management payment methods, as well as processing outgoing and incoming payments.

Receivables analysis

Receivables analysis works with two different types of information: On the one hand, you can look at a customer’s outstanding payments, and on the other, the customer’s payment behavior. With information about their outstanding payments, the accounts receivable department can provide information on the company’s liquidity. If management knows when to expect which payments, it can get information about the financial leeway over time and can adjust its planning accordingly.

In addition, the accounts receivable department also keeps an eye on the customers themselves, as mentioned above. Information about individual debtors’ payment behavior, but also an analysis of all customers’ general payment behavior provides early information about potential risks for the company and possibly within the entire industry. There are also special key ratios for this, like the distribution of sales per customer and per item, the average payment days for accounts receivable, the extent of cash discount utilization, or trends on days in arrears.

Accounts receivable aged debtor report

“Aged debtor lists” are an important analysis tool. These are lists that contain the temporal distribution of open items. The aging lists summarize data on the payment behavior and creditworthiness of customers and group the receivables according to their age from the invoice date or due date – up to 30 days, 30 to 60 days, and so on. Such lists include data like customer credit limits and utilization, due dates, and payment overruns. Depending on the company’s product range, these lists can be created according to customer groups, product groups, or other criteria.

Accounts receivable tasks, with example

Let’s say your company produces and sells plastic parts. A customer approaches you and would like to order a special part in large quantities. Since this is a large order, the first step for accounts receivable is to evaluate the customer’s financial situation and payment history. If nothing unusual can be reported from this source, the supply contract can be concluded. It regulates the type of delivery and the deadlines for invoicing and payments: Delivery is to be made “just-in-time” for production at the customer’s, in each case on all. Partial invoices are sent monthly and payment periods of 30 days are agreed. The accounts receivable department records and sends the partial invoices and monitors the associated incoming payments.

Since the new customer for this order is not as reliable as before and exceeds payment deadlines, accounts receivable writes appropriate payment reminders and informs the sales department about the situation. Their discussions with the customer do not initially lead to an improvement in the situation. For this reason, the accounts receivable department formulates a reminder with the threat of a delivery stop. The customer then reacts with accelerated payments. The receivables analysis documents the payment difficulties and saves this information for possible further business with the customer.

Difference to accounts payable

The opposite sub-area of financial accounting for accounts receivable is accounts payable. While the former deals with relationships between customers, the latter deals with vendors. Accounts payable accounting can also help the company keep an eye on liquidity. Goods and services are purchased on account and paid using payment terms and cash discounts.

Accounts payable records the level of debt for specific suppliers. Accounts payable and accounts receivable together therefore provide a picture of the current financial situation of the company in relation to suppliers and customers – which payments are due when, and which revenues are to be expected when.

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