Accounts Receivable Accounting Best Practices

Accounting for accounts receivable is one of the driving forces behind any business. You can't expect a venture to thrive if it has payments stuck and an uncertain cash flow situation.

Setting up a fluid accounts receivable accounting process can make revenue management much easier for a business. It involves designing invoicing procedures, creating credit policies, and devising collection strategies. If you can overcome the challenges in each of these procedures and devise a systematic AR accounting process, you can then focus on the larger goals of your organisation.

If you're a UK business, you must know how the corporate community suffers from late payments and overdue invoices. The fact that about 73% of UK businesses experience some form of negative impact due to late payments speaks for itself¹.

This guide covers some best practices to help a UK business design an efficient accounts receivable accounting system. And while we're on this page discussing ways to keep your payments coming on time, consider tools like Wise Business to make things easier.

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What is Accounts Receivable Accounting?

Let's break down receivables accounting in a simple way:

It's basically how a business keeps track of the money its customers owe for things they've bought or services they've used. Think of it as managing IOUs from your clients.

In business, receivables accounting isn't just about noting who owes what. It's a whole system that includes sending out bills (invoicing), following up on payments, setting rules for credit and payment, and dealing with unpaid bills.

Why is this important?

Well, the faster you get paid, the more cash your business has on hand. This cash flow is vital for paying your bills and growing your business. Late payments can turn into no fees if you don't manage your receivables accounting well. This, inevitably, means less money in your bank and potential problems keeping your business running smoothly. In contrast, a sound AR accounting system helps you get paid quickly and keeps your business financially healthy.

Is Accounts Receivable a Debit or Credit?

Yes, accounts receivable is a debit. This is because it represents money owed to the company by its customers for goods or services that have been delivered or rendered but not yet paid for. From an accounting perspective, accounts receivable are considered an asset. It is a resource that will provide future economic benefits for the company through incoming cash payments.

Once payment is received, the accounts receivable account is credited, lowering its balance. Meanwhile, the cash account, another asset, is debited to reflect the inflow of funds.

Real-time Example of AR Accounting in a Business

Imagine a furniture company called "Comfort Living" that sells sofas and dining sets to individual and corporate clients. One of its regular corporate clients, a hotel chain, places a bulk order worth £50,000 and agrees to pay within 30 days.

Comfort Living records the £50,000 as accounts receivable when the order is delivered. This transaction increases their assets and recognizes the revenue, even though the cash hasn't been received yet. Using accounts receivable (AR) accounting, the company can:

• Monitor which clients owe money and how much: This makes follow-ups and collections more efficient.
• Know when payments are due: This can help the finance teams to plan expenses, such as payroll and inventory purchases, without running into cash shortages.
• Identify which clients regularly delay payments: This can help the business to make informed decisions about offering credit in the future.

In this way, AR accounting helps Comfort Living maintain financial stability and make strategic decisions based on predictable income streams.

Best Practices for Receivables in Accounting When Running a Business

Before starting with this section, you should know that there's no one-size-fits-all AR accounting model for every business. Instead, there are some general practices that most companies may find helpful. These are:

Embed Automation Technology

Technology in the accounts receivable processes can streamline business operations and strengthen your company's financial management. Automation reduces human errors common in manual processes, ensuring greater accuracy and reliability. It also allows employees to shift their focus from routine tasks to more strategic business areas, like customer management.

The key benefits of automating accounts receivable are:

• Quicker invoicing and payment cycles
• Reduced manual entry mistakes
• Frees up staff for strategic tasks

Automation can help with instant invoicing and timely reminders for overdue payments when used with the right tools and strategy. Plus, your business can manage updated financial data using the latest communication tools.

Conduct Proper Credit Management

Giving customers credit directly or through third parties can boost sales. But it also comes with risks. Proper credit management helps reduce these risks, improve cash flow, and strengthen financial stability, essential for keeping trade receivables in the balance sheet healthy.

Credit management matters because it:

• Helps avoid late payments
• Prevents bad debt
• Builds trust and encourages strong client relationships

To improve credit management, businesses should use standardized credit applications for consistency. Partnering with credit agencies for deeper client insights and regularly reviewing credit limits to reflect changes in customer activity are also required. These innovative practices support growth while managing finances well.

Track the Right KPIs

KPIs (Key Performance Indicators) are quantifiable metrics that help measure business progress. The following are some AR performance metrics that support effective accounts receivable reconciliation and help maintain a healthy cash flow:

• Days Sales Outstanding (DSO): Measures the average time to collect payment. Aim to keep it under 30 days.
• Average Days Delinquent (ADD): Tracks how many days payments are overdue. The lower, the better—rising ADD may indicate billing or staffing issues.
• Accounts Receivable Turnover Ratio: Shows how quickly revenue is collected. A low ratio means faster cash flow; a high one suggests many open, unpaid accounts.
• Collection Effectiveness Index (CEI): Indicates the percentage of receivables collected. Closer to 100% reflects strong collection practices.
• Revised Invoices: Frequent revisions may point to errors or inefficiencies in billing. Monitor trends and assess whether process updates or staffing adjustments are needed.

Your business will stand a better chance of success if decisions are made according to these metrics.

Set Clear Credit and Collection Policies

If you plan to offer clients credit, establish clear policies in advance to avoid overextending. Make it easy for your team to determine credit eligibility when a client requests it.

For collections, adopt a proactive approach. Instead of reacting to late payments, send multiple reminders before the due date. This gentle communication keeps customers informed and maintains a positive relationship. Every interaction, like support or follow-ups, is a chance to reinforce payment reminders.

When dealing with clients who have multiple overdue invoices, use each new invoice as an opportunity to list all outstanding payments. This keeps the process clear and helps avoid confusion.

Offer Flexible Payment Options

Clients love it when a business is considerate and offers a smooth payment solution. A key element to ensure flawless cash flow management in today's globalized world is to be flexible with payments. Create a system that automates parts of your accounts receivable process and makes it easier for customers to pay. You can use a payment portal that clearly shows everything the customer needs to know (like the amount they owe and how they can pay) in one place.

Many assume late payments mean a customer is unreliable, but that's not always true. If you're regularly getting paid late, the issue may be with your invoicing or payment process. The solution? Make it as simple as possible for customers to pay. Stay in touch and provide clear, convenient online payment options or instructions.

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FAQs - Accounts Receivable Accounting Best Practices

Here are some of the most common questions answered:

What's the journal entry for accounts receivable?

The accounting entry to record accounts receivable is a debit to the accounts receivable account. This happens when you make a sale, and the customer doesn't pay immediately. The debit increases the balance of the accounts receivable account, indicating that a customer now owes your business money.

Why is accounts receivable accounting important for a business?

Accounts receivable accounting is crucial for healthy cash flow, minimizing bad debt, providing financial visibility, and ensuring accurate reporting.

What are some common challenges in AR accounting?

Late payments, disputes, bad debt, inefficient processes, and inaccurate record-keeping are some challenges of accounts receivable accounting.

Sources used:

Sources last checked on date: 30-Jun-2025