In most cases, you can use a full cycle double-entry bookkeeping system to meet the management of accounts receivable and payable says, William D King. Here is my understanding of how this works:
Start with recording transactions in account AR for any invoices you receive from customers, then record the payment made by cash or check in account CP (or checking account) for all bills paid. The goal is to keep the total balance of both accounts close enough to zero throughout a month period – they will never be exactly equal because there is timing differences between when invoices were issued and payments received…
After a few months review your AR/AP balances, if one has substantially larger than the other, it could be possible that the customer’s credit level is low (in AR) or supplier’s credit terms are short (in AP), then you know that you need to take some action to ensure your bookkeeping system is working smoothly for this customer or supplier.
The double-entry bookkeeping will not only allow us to manage accounts receivable and payable but also provide an important tool for tracking customers’ OR suppliers’ financial health.
#AP-1: AcctsReceivable-1
Account AR – Bills Receivable (Customer)
Invoice # Date Product Description Amount Paid Status Note 1/1/2013 Keychain $15.00 PAID, 10/31/2013 Invoice 2 was issued on 1/3/, but received only on 1/22; we made a discount for this late payment because the customer had a good credit rating…
Record all your invoices in account AR and the related payments in CP: Start with both current asset and liability accounts (could be COA and CLOA if you like). Your goal is to keep these two accounts close enough to zero during a month period. You can monitor them daily or monthly depending on the volume of your business says, William D King.
There are no rules on when to use debit and credit transactions in this method. We just do it according to the normal double-entry bookkeeping process: Debit an expense account if you pay cash or debit a liability account if you get paid by customers. Credit a revenue or asset account if you receive cash or credit a liability account if you pay bills.
10/31/2013 Cash $5.45 Paid Invoice #2 (Note: we made a discount for this late payment because the customer had a good credit rating…)
10/31/2013 Supplier Bills Payable $20.00 PAID, 11/4/2012 Supplier invoice was issued on 10/22 and received on 10/29; we did not issue an additional invoice because it was paid within terms…
11/1/2013 Cash $25.00 Credited AR-1; Received customer’s 1st order with the total amount of $35 (including shipping) 11/3/2013 Cash $36.95 Credited AR-2; Received customer’s 2nd order with the total amount of $46.95 (including shipping)
11/5/2013 Cash $25.00 Credited AR-1; Received customer’s 3rd order with the total amount of $35 (including shipping) 11/17/2013 Supplier Bills Payable $10.00 PAID, 12/1/2012 Supplier invoice was issued on 11/05 and received on 11/12; we did not issue an additional invoice because it was paid within terms…
12/1/2013 Cash $15.00 Paid Invoice #3 (Note: we made a discount for this late payment because the customer had a good credit rating…)
12/4/2013 Customer Bills Receivable -$15.00 Credited AR-1 & CP-1; Paid customer’s 4th order in the full amount
12/5/2013 Cash $25.00 Credited AR-2; Received customer’s 5th order with the total amount of $35 (including shipping) 12/19/2013 Cash $16.65 Credited AR-3; Received customer’s 6th order with the total amount of $26.65 (including shipping)
Increase or decrease your AR balance if needed. If you find that one account has a substantially larger number than the other. It could be possible that the customer’s credit level is low or the supplier’s credit terms are short… You can consider asking your customers to extend their credit period or getting a longer payment term from your supplier.
#AP-1: AcctsPayable-1
Account AP – Bills Payable (Supplier)
Invoice # Date Product Description Amount Paid Status 1/1/2013 Supplier Invoice $75 PAID, 10/19/2012 the invoice was issued on 1/3/, but received only on 1/22; we made a discount for this delay because the supplier had a good credit rating…
Record all your invoices in account AP and the related payments in CP. As for AR, there are no rules on when to use debit and credit transactions for this method explains William D King. Your goal is to keep these two accounts close enough to zero during a month period. You can monitor them daily or monthly depending on the volume of your business.
There are no rules on when to use debit and credit transactions for this method. Your goal is to keep these two accounts close enough to zero during a month period. You can monitor them daily or monthly depending on the volume of your business.
Periodic Statement:
When you need to convey information about the balances in AR and AP, it would be sensible. To produce an Accounts Receivable/Accounts Payable statement (or whatever names you like) as shown below:
Conclusion:
Obviously, if both AR and AP decrease or increase simultaneously, there is no difference between those variations; but if one increases more than the other that means that some payments were received earlier than expected… Which customer paid early? Or the customer’s credit rating was not as good as expected a month ago? It is up to you to analyze those variations and decide if there is any follow-up action required.