Accounts Receivable (AR)

Accounts Receivable (AR) refers to the outstanding amounts owed to a business by its customers for goods or services
delivered but not yet paid for. It is classified as a current asset on the balance sheet because it is expected to be converted
into cash within a year.

Key Concepts of Accounts Receivable:

Term Explana on

Invoice Document issued to the customer detailing the amount due.

Customer The party who owes payment to the business.

Credit Terms Payment terms like Net 30, Net 60, etc.

Due Date The date by which payment must be made.

Aging Report Shows outstanding invoices grouped by how long they’ve been overdue.

Collec ons Follow-up ac vi es to receive the outstanding payments.

Bad Debts Receivables considered uncollec ble.

Allowance for Doub ul Accounts Es mated por on of receivables that may not be collected.

Accounts Receivable Process Steps:

1. Sales Order Processing

2. Goods/Services Delivery

3. Invoice Genera on & Dispatch

4. Recording Receivables in ERP

5. Customer Payment Receipt

6. Cash Applica on

7. Reconcilia on and Follow-Up

 Journal Entry (at the me of sale on credit):

Dr. Accounts Receivable XXX

Cr. Sales Revenue XXX

Journal Entry (when cash is received):

Dr. Cash/Bank XXX

Cr. Accounts Receivable XXX

Important Reports in AR:

 AR Aging Report

 Customer Balance Summary

 Days Sales Outstanding (DSO)

 Collec on Effec veness Index (CEI)

Common ERP T-Codes (SAP):

T-Code Descrip on

FB70 Create customer invoice

F-28 Post incoming payment

FBL5N Customer line item display

FD10N Customer balance display

 Sales Order Processing

Sales Order Processing is the end-to-end process a business follows to receive, manage, and fulfill customer sales orders. It
ensures mely delivery, accurate invoicing, and proper revenue recogni on.

Sales Order Processing Steps:

1. Order Crea on

o Sales order is created based on a customer purchase request (e.g., email, website, phone call).

o Includes details like customer name, product, quan ty, price, terms, and delivery address.

2. Order Review and Approval

o Validate stock availability, credit limit, pricing, and delivery melines.

o Internal checks may include managerial or finance approval.

3. Order Confirma on

o Send confirma on to the customer with expected delivery date and order summary.

4. Order Fulfillment (Picking and Packing)

o Warehouse picks the goods from inventory and packs them for shipment.

5. Shipping and Delivery

o Goods are shipped through a logis cs provider.

o Tracking informa on is shared with the customer.

6. Invoicing

o Invoice is generated and sent to the customer based on the order.

7. Payment Collec on

o Customer makes payment based on agreed terms (e.g., Net 30, advance payment).

8. Order Closure and Repor ng

o Order is closed in the system.

o Data is updated for inventory, accoun ng, and sales repor ng.

Documents Involved:

 Sales Order (SO)

 Delivery Note

 Packing List

 Invoice

 Customer Acknowledgment
Common ERP T-Codes (SAP Example):

 VA01 – Create Sales Order

 VA02 – Change Sales Order

 VA03 – Display Sales Order

 VL01N – Create Delivery

 VF01 – Create Billing Document

Key Controls:

 Credit check

 Pricing valida on

 Stock availability check

 Segrega on of du es between sales, warehouse, and finance

 Goods/Services Delivery

Goods/Services Delivery refers to the process of transferring goods or providing services to the customer as agreed in a
sales order or contract.

Summary:

 Goods Delivery: Physical movement of products from seller to buyer (includes shipping, logis cs, and delivery
confirma on).

 Services Delivery: Execu on of agreed-upon tasks or services (includes me tracking, service reports, or milestone
comple on).

 Key Documents: Delivery Note, Goods Receipt, Proof of Delivery (POD), Service Comple on Report.

 SAP T-Codes (if applicable):

o VL01N – Create Delivery

o VL02N – Change Delivery

o VL03N – Display Delivery

 Invoice Genera on & Dispatch

Invoice Genera on & Dispatch refers to the process of crea ng and sending invoices to customers for goods delivered or
services rendered. Here's a brief breakdown:

1. Invoice Genera on

 Input Data: Customer details, sales order, delivery note, pricing, tax details.

 Tools Used: ERP systems like SAP, Oracle, QuickBooks, Tally.

 Invoice Contents:

o Invoice Number & Date

o Customer Name & Address

o Itemized List of Products/Services

o Quan ty & Rate

o Taxes (GST/VAT)

o Total Amount

o Payment Terms

o Due Date

2. Invoice Approval (Op onal)

 Internal review and approval before dispatch (especially in large organiza ons).

3. Invoice Dispatch

 Modes of Dispatch:

o Email: As PDF or system-generated link

o Post/Courier: For customers who request hard copies

o Customer Portal Upload: For B2B clients

 Tracking: Confirma on of receipt, read acknowledgment

4. Follow-up

 Payment follow-up as per due date (Accounts Receivable team)

 Recording Receivables

Recording Receivables in ERP (Enterprise Resource Planning) involves capturing the amounts owed by customers for goods
or services delivered. This is a key step in the Order to Cash (O2C) cycle. Here's a simplified overview of the process:

Steps to Record Receivables in ERP

1. Sales Order Crea on

o A sales order is created based on customer requirements.

2. Goods/Services Delivery

o Goods are shipped or services are delivered.

o A delivery document is created in the ERP system.

3. Invoice Genera on

o A customer invoice is generated in the system.

o ERP Example:

 SAP T-Code: VF01 (Create Billing Document)

 Oracle: Use Receivables > Transac ons > Transac ons

4. Accoun ng Entry (Journal Entry)

o The system posts the following entry automa cally:

o Accounts Receivable (Customer A/c) Dr

o To Sales Revenue

o To Tax Payable (if applicable)

5. Customer Account Updated

o The customer's account balance increases by the invoice amount.

6. Aging Analysis and Monitoring

o Open receivables are tracked through aging reports.

o Follow-up done for overdue invoices.

7. Payment Receipt & Reconcilia on

o Payment is received and recorded.

o Receivable is cleared in the ERP system.

Key Data Captured in ERP

 Customer Name / ID

 Invoice Number & Date

 Due Date

 Invoice Amount

 Tax Details

 GL Codes (Revenue, Tax, A/R)

 Payment Terms

 Sales Order / Delivery Reference

Purpose

 Accurately reflect receivables in financial statements.

 Enable mely follow-up on outstanding payments.

 Support repor ng and audit trails.

 Customer Payment Receipt

Customer Payment Receipt refers to the acknowledgment of payment received from a customer for goods sold or services
rendered. It is both a financial record and proof of transac on, issued by the seller to the customer.

Key Components of a Customer Payment Receipt:

1. Receipt Number – A unique iden fier for tracking.

2. Date of Receipt – When the payment was received.

3. Customer Name – The paying customer's name or company.

4. Invoice Number(s) – Reference to the invoice(s) being paid.

5. Payment Amount – Total amount received.

6. Payment Mode – Cash, Cheque, Bank Transfer, Credit Card, etc.

7. Outstanding Balance (if any) – If par al payment, the remaining amount.

8. Authorized Signature / Seal – From the receiving company.

9. Thank You Note – (Op onal) for professional e que e.

Sample Customer Payment Receipt Format:

--------------------------------------------------

CUSTOMER PAYMENT RECEIPT

--------------------------------------------------

Receipt No: RCPT-2025-001

Date: 16-July-2025

Received From: John Doe Enterprises

Invoice No: INV-2025-0456

Payment Amount: ₹15,000

Payment Mode: NEFT Transfer

Bank Reference: UTR123456789

Received By: XYZ Solu ons Pvt Ltd

Authorized Sign: ___________________

Thank you for your payment!

--------------------------------------------------
Purpose in Accoun ng:

 Updates Accounts Receivable ledger.

 Helps in bank reconcilia on.

 Supports audit and internal control.

 Used for customer queries and dispute resolu on.

 Cash Applica on

Cash Applica on is a crucial part of the Accounts Receivable (AR) process in accoun ng, where incoming customer
payments are matched to their respec ve invoices to clear open receivables.

Purpose of Cash Applica on:

 To ensure accurate matching of customer payments to invoices.

 To update the AR ledger and maintain clean books.

 To improve cash flow visibility and reduce DSO (Days Sales Outstanding).

Cash Applica on Process Steps:

1. Payment Receipt

o Receive payments via bank (Wire, ACH, Cheque, etc.).

2. Payment Iden fica on

o Iden fy customer using payment details (remi ance advice, bank statement, etc.).

3. Invoice Matching

o Match payment to the correct open invoice(s).

4. Apply Payment in ERP System

o Post journal entries to reduce outstanding AR and update ledger.

5. Handle Unapplied/Short Payments

o Park, dispute, or follow up on par al or uniden fied payments.

6. Reconcilia on and Repor ng

o Reconcile customer accounts and generate AR aging reports.

Journal Entry Example:

Account Debit Credit

Bank Account (Cash) ₹10,000

Accounts Receivable (Customer) ₹10,000

Common Tools/ERP Used:

 SAP (T-code: F-28 for incoming payments)

 Oracle

 QuickBooks

 HighRadius, Billtrust, etc. (for automa on)

Challenges in Cash Applica on:

 Missing or incomplete remi ance informa on.

 Deduc ons and short payments.

 Payments without invoice references.

 Manual processing delays.

 Collec on

In accoun ng and finance, Collec on refers to the process of receiving payments from customers for goods or services
rendered, typically as part of the Accounts Receivable (AR) process.

Key Aspects of the Collec on Process:

1. Invoice Issuance – Send invoices to customers a er sales/service.

2. Payment Follow-Up – Send reminders or follow-up communica ons.

3. Receiving Payments – Collect payments via bank transfer, cheque, credit card, etc.

4. Cash Applica on – Match received payments with open invoices in the ERP system.

5. Dispute Management – Resolve discrepancies or disputes if payments don’t match.

6. Aging Analysis – Track overdue accounts using AR Aging Reports.

7. Collec on Escala on – Escalate long-pending dues to legal or collec ons team.

Related SAP T-Codes (if using SAP):

 F-28 – Post incoming payments

 FB05 – Post with clearing

 FD10N – Customer line item display

 FBL5N – Customer open/cleared items

 S_ALR_87012178 – Customer due date analysis

 Accounts Receivable (AR) Reconcilia on

Accounts Receivable Reconcilia on

Defini on:
AR Reconcilia on is the process of verifying that the amounts in the accounts receivable ledger match with the general
ledger (GL) and customer balances.

Key Steps:

1. Extract Customer Ledger Balances

o From sub-ledger (AR module) and general ledger.

2. Compare Balances

o Match customer-level balances between AR sub-ledger and GL.

3. Iden fy Discrepancies

o Look for unapplied cash, duplicated entries, or wrong pos ngs.

4. Review Aging Reports

o Analyze the aging of outstanding invoices (e.g., 0-30, 31-60, 61-90, 90+ days).

5. Inves gate and Resolve Differences

o Adjustments, reclassifica on, or journal entries if needed.

6. Reconcile Customer Payments

o Match receipts with open invoices.

7. Document and Sign-off

o Maintain reconcilia on logs, approvals, and audit trail.

Documents Used:

 Customer statement of account

 AR aging report

 Cash receipts journal

 General ledger extract

 Bank statement (for receipts)

Journal Entries (Examples):

 Customer Invoice Pos ng

 Dr Accounts Receivable

 Cr Sales Revenue

 Customer Payment Receipt

 Dr Bank

 Cr Accounts Receivable

 Write-off Bad Debt

 Dr Bad Debt Expense

 Cr Accounts Receivable
 Follow-Up Process

Objec ve:
Ensure mely collec on of outstanding dues by following up with customers.

Follow-Up Steps:

1. Send Reminder No ces

o Based on due dates (e.g., 5 days before due, on due date, a er due date).

2. Make Customer Calls or Emails

o Contact customers for overdue invoices.

3. Dispute Resolu on

o Address any claims or issues customers raise.

4. Escala on

o Escalate long-pending invoices to senior management or collec ons.

5. Payment Arrangement

o Nego ate installment plans if required.

6. Update Collec on Notes

o Record each interac on for future tracking.

7. Aging Review

o Regularly monitor AR aging to priori ze follow-ups.

Key Metrics to Track:

 Days Sales Outstanding (DSO)

 Aging buckets (0–30, 31–60, etc.)

 Collec on Effec veness Index (CEI)

 % of overdue receivables

 Dispute resolu on turnaround me