How to Calculate Acounts Receivable

How to Calculate Acounts Receivable | Accounting Smarts
Charles Hall

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Charles Hall

on

March 1, 2021

Accounts receivables is cash waiting to be collected. Understanding how to calculate accounts receivable is critical to the success of any business.

They say cash is king, well accounts receivables are the next best thing as it is cash waiting to be collected.  Understanding how to calculate accounts receivables is critical to the success of any business.  Relying on an incorrect accounts receivable balance or not relying on it at all can lead to poor decisions.

Accounts receivables are calculated by taking the beginning accounts receivable balance, adding any new invoice totals and subtracting any customer payments.  This may sound simple, and it is once you understand the process. 

It is important to fully understand accounts receivables so you can make smart business decisions.  If accounts receivables get too large, you run the risk of running out of money which could significantly affect your business.

So, if you are new to the concept and processes surrounding accounts receivables you will want to review this article to understand the basics.  Even if you have someone else handling your accounting needs, you will become a better manager, a better leader, and a better business owner if you understand these concepts.

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What is accounts receivable?

Accounts receivables is the amount of money owed to you by a customer for a product or service you provided to them.  In other words, the customer did not pay you cash at the time of purchase, rather you extended them credit allowing them to pay at a later date.

What is an example of an accounts receivable?

An example of a product accounts receivable includes a pin company selling its customer 100 custom pins.  Each pin cost $2.50 for a total of $250 dollars.  The pin company gives the customer an invoice for $250 and then records an accounts receivable in the customer's name for the same $250.  The pin company then waits for the customer to pay the bill.  Once the customer pays the invoice in full, the accounts receivable balance is then reduced to zero.

An example of a service accounts receivable is similar.  A consulting company provides management training to their customer and charges $1000.  The consulting company gives the customer an invoice for $1000 and records the service as an accounts receivable.  The consulting company then waits for the customer to pay the bill.  Once the customer pays the invoice in full, the accounts receivable balance is then reduced to zero.

Do accounts receivable go on the balance sheet or the profit and loss statement?

Accounts receivables total balance is found on the balance sheet under the asset section.  The number listed next to the accounts receivable line is the sum total of money owed you by your customers.  We have provided a simple layout below detailing what a basic balance sheet looks like.  Yours may have more or less than this but will give you an idea of where to find the accounts receivable balance.

Balance Sheet

ASSETS

  • Cash
  • Accounts Receivables
  • Fixed Assets
  • Other Assets
  • TOTAL ASSETS

Liabilities and Equity

LIABILITIES

  • Accounts Payable
  • Credit Cards
  • Other Current Liabilities

EQUITY

  • Owners Stock
  • Distributions
  • Retained Earnings
  • Net Income
  • Total Equity
  • TOTAL LIABILITIES AND EQUITY

Is accounts receivable a debit or a credit?

Accounts receivable is always a debit balance.  It is the combined total amount owed you by all customers.  If you ever have a negative accounts receivable balance most likely you have created an incorrect entry or you have received an amount in excess of what your customers owed.  You will want to correct this immediately to avoid making bad decisions.

How are accounts receivables tracked?

Accounts receivables are tracked in detail and in total.  The details of each transaction and payment, by customer, will be recorded in a subsidiary ledger also known as a subledger.  The total accounts receivables will be recorded as a debit on the balance sheet.  The total of the subledger should always match the total of the accounts receivable total on the balance sheet.

What is accounts receivable beginning balance?

The accounts receivable beginning balance is the opening balance on the first day of a specific period.  If you are starting a new business your opening balance will be zero.  If you are an existing business and have been selling to customers on credit the opening balance is the amount on the first day of a new month, or a new year.  

How do you calculate monthly accounts receivable?

Calculating monthly accounts receivable is accomplished by increasing the beginning balance for any additional customer invoices issued during the period or decreasing the total amount for any additional customer payments received during the period.

Keeping track of individual transactions by customers is critical as this helps you easily keep a running total of accounts receivables.  

Will my accounting software calculate accounts receivables?

Most accounting systems will automatically track accounts receivables.  All you are required to do is record the transaction with the customer and the system will automatically enter the transaction in the accounts receivable subsidiary ledger and update the total balance on the balance sheet.

Two of the most common small accounting systems are Xero.com and QuickBooks Online.  Both of these handle accounts receivables as described.

Can you adjust accounts receivables?

By its nature accounts receivables are being adjusted regularly by adding invoices and receiving payments.  So, if you are asking can you adjust accounts receivables it probably means you have a known error.  Any adjustment you make should be done at the transaction level, this will ensure that the subsidiary ledger and the accounts receivable balance on the balance sheet remain in balance.

The great thing about accounting is everything can be adjusted, even accounts receivables.  The better question is should you adjust accounts receivables?  Because most accounting software automates accounts receivables it is best to avoid manually adjusting accounts receivable as it can create some unwanted problems.  If you understand what you are doing, then yes, it is possible.  But, if you don’t understand what you are doing this may be the time to consult the online help desk of the software you are using, or an experienced accountant.

How to find the accounts receivable balance in QuickBooks Online

  1. Select “Reports” on the left side navigation
  2. Click on “Balance Sheet”
  3. Look for the Accounts Receivable balance just under the Bank Accounts section.

How to find accounts receivable balance in Xero

  1. Click on the “Accounting” button on the top navigation
  2. Click on “Balance Sheet” in the drop down
  3. Look for the Accounts Receivable balance just under the Total Cash and Cash Equivalents section.  

Different accounting systems will have different navigation, but you can see the concept is basically the same.  You are looking for the balance sheet report which will always be found under the “reports” section.

Is accounts receivable important?

Yes, Yes and Yes again.  Accounts receivable is one of the most important accounting numbers to understand.  It takes money to operate a business.  If you sell on credit, you don’t want all your cash to get tied up in accounts receivable.  

Accounts receivable is not cash until you collect it, so it is important to understand the accounts receivable balance.  Most companies will have a strategy to monitor accounts receivable, and make collection calls to ensure the payments come in a timely manner.

There are several reports that can help you manage your accounts receivables but the most important is your customer receivable aging report.  This will help you know how old the accounts receivable balances are for each customer.  The older an account gets the less likely it is that you will collect it.  If you don’t collect it, you lose the use of that money forever.

A good strategy for managing your accounts receivables is to begin contacting your customers on the date the invoice is due.  Many customers have certain dates they pay their invoices and so the longer you wait the longer it is to receive the payment.

Remember, accounts receivable is an asset but only if you collect it.

Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall