What is an account receivable in accounting, and how do you integrate it into your balance sheet?
What is an accounts receivable in accounting? Among the many terms used in the field, accounts receivable, recorded in account 411 of the balance sheet, are a common one.
But how do accounts receivable work, and how do they fit into the chart of accounts? What must be entered to comply with accounting principles? And how do you keep track of your accounts receivable? We explain everything in this article.
What is an accounts receivable in accounting?
Accounts receivable in accounting: definition
An account receivable is one of the class 4 balance sheet accounts in the general chart of accounts.
It records all the charges you bill to your customers following a sale of goods or provision of services, for example:
- it includes invoices issued but not yet paid;
- it allows you to accurately trace the exact amount invoiced.
💡 You can create as many accounts as you like; one for each customer is common practice.
These accounts give you an overview of financial flows from your customers and identify all outstanding receivables. An essential tool for keeping your accounts up to date.
Differences between accounts receivable and accounts payable
What are debit and credit in accounting? Very simply, there are two columns within a customer account:
- The "debit" column refers to amounts invoiced to customers that have not yet been paid. The idea here is to collect the sums due from your customers on time. This will enable you to pay your current liabilities.
- The "credit" column, on the other hand, records amounts paid by customers and therefore collected by your company. The idea is to match the exact amount in the debit column with the exact amount in the credit column.
Accounts receivable and payable in 2024: an in-depth understanding
With recent changes in accounting, it has become even more pertinent to clearly understand the distinctions and links between accounts receivable (411) and accounts payable (401).
Fundamental distinctions:
- Nature of Accounts:
- Accounts receivable (411): Represents the company's receivables from its customers. Appears on the assets side of the balance sheet, as it is a potential source of cash for the company.
- Supplier account (401): Represents the company's debts to its suppliers. Appearing on the liabilities side of the balance sheet, it shows the amounts the company has to pay.
Similarities and joint management:
- Interdependence in Cash Flow: In 2024, accounting software will offer an integrated view of these accounts, highlighting their interdependence and joint impact on the company's cash flow.
- Automated management: Advanced functionalities enable simultaneous and consistent management of these accounts, facilitating the monitoring of incoming and outgoing financial flows.
Impact of Technological Innovations:
- Accurate and Predictive Analysis: Modern accounting tools provide detailed analyses of these accounts, enabling working capital requirements to be forecast, and payment and collection strategies to be optimized.
What is account 411 in the chart of accounts?
Focus on account receivable 411
In accounting terms, trade accounts receivable are attached to account 411 on the balance sheet under the name " Trade accounts receivable" .
Account 411 is actually a sub-account, i.e. a sub-category of Class 4 balance sheet accounts . These Class 4 accounts are known as third-party accounts .
💡 Please note: in accounting, the supplier account is also a third-party account. It's called account 401 "trade payables".
On the other hand, "accounts receivable" and "accounts payable" do not appear in the same parts of the accounting balance sheet:
- Accounts receivable appear on the assets side of the balance sheet, in the accounts receivable section :
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- accounts payable appear on the liabilities side of the balance sheet, in the operating liabilities section:
The customer account in the balance sheet
ℹ️ Please note: The balance sheet is made up of :
- class 1 to 5 accounts, corresponding to balance sheet accounts,
- class 6 to 7 accounts, corresponding to income and expense accounts
- class 8 accounts, which are special accounts.
👉 To understand the accounts listed on the chart of accounts, refer to the Plan Comptable Général, better known as the PCG. The PCG brings together the accounting standards applied in France and formalizes the bookkeeping of companies and organizations.
How do I keep track of my accounts receivable?
Recording invoices in the customer account
First of all, it's important to know that the sale of services or goods is invoiced net of tax (HT) if your company is subject to VAT.
How do you enter an invoice in your accounting records?
- Issue a sales invoice.
- Debit account 4181 in your accounting ledger. This 4181 account corresponds to the "Accounts receivable - invoices to be issued" account, which is debited for the amount of the goods or services delivered, excluding VAT,
- Credit the invoice amount to account 44 587 entitled "Sales taxes on invoices to be issued", as well as to one of the following two accounts:
- account 706 "Services supplied", or
- or account 707 "Sales of goods".
Accounting entries are made :
- either manually, if you use an Excel spreadsheet for your accounting,
- or automatically if you use accounting software.
👉 Not all companies are allowed to do their accounting on Excel. Are you one of them?
Lettering a customer account
As we saw earlier, the purpose of a customer account is to match the credit amount to the debit amount. This is precisely what lettering is used for in accounting.
Lettering is a technique that assigns a letter of the alphabet to a single transaction. The same letter is assigned to the transaction in the debit column and to the transaction entered in the credit column.
Example:
- An invoice has been issued to a customer.
- The amount appears in the debit column only. This amount corresponds to the debt owed by the customer.
- When payment is made, another line is automatically created with an amount appearing in the "credit" column.
The lettering system then associates the two lines with the corresponding "debit" and "credit" amounts.
Lettering has several advantages:
- identify potential errors,
- find out whether a customer's payments are up to date,
- follow up and, if necessary, follow-up with customers.
Good to know: In 2024, accounts receivable lettering will have undergone significant advances, thanks to advanced automation technologies. Most of today's software packages are capable of performing automatic lettering, assigning letters to transactions and accurately matching debits and credits.
Customer accounting with the right software: The evolution in 2024
If you manage your accounts without a chartered accountant and would like to automate the tracking of your accounts receivable, a few accounting software packages could come in handy on a daily basis.
Accounting software lets you, among other things:
- track customer receivables and invoice payments,
- dun customers if necessary,
- collect all your suppliers' invoices from your mailbox, customer areas or Slack,
- perform bank reconciliations in real time,
- automate accounting entries and limit data entry, and therefore the associated human errors.
Some examples of software :
- iPaidThat
- ISACOMPTA - AGIRIS
- Sinao
- SumUp Invoices
In 2024, adopting state-of-the-art accounting software is no longer a luxury, but a necessity for any company wishing to optimize its financial management and project itself into the future with confidence. Adapting and embracing these changes is crucial to maintaining efficient, up-to-date accounts receivable.
The key role of the customer account
The customer account is a key account in your accounting system. It gives you a precise view of your customers' receivables, as well as of the incoming flows that will enable you to finance your current liabilities.
It's now up to you to use the best practices listed in this article to monitor your accounts receivable on a daily basis.
Article translated from French