Accounts Receivable: How Much Do Clients Really Owe?
If I asked you how much money your customers owe you, would your answer be accurate? When your Accounts Receivable numbers are accurate and up to date, you become more confident making business decisions. You can base decisions on financial statements that you can trust.
Identify Balance Sheet Inaccuracies
Basically, Accounts Receivable is a line on your balance sheet that shows the money your customers owe. You already billed these customers, but they haven’t paid yet. When you look at your financial reports, do you know whether the Accounts Receivable number shows the actual amount clients owe? In my experience as a bookkeeper, I have identified three things that can throw off this number:
- Old balances that have been deemed uncollectible
- Old customer credits that have not been paid back or cleaned up
- Prepayments or Down Payments
First, let’s look at old balances. Old balances are sales you made but you haven’t received payment. To evaluate these old balances, run an Accounts Receivable Aging Summary. The Aging Summary shows who owes you money and the past-due date. Start by looking at the column 91 days and over. Click on each entry to see how long you’ve been waiting to be paid. For example, an invoice that’s over a year old may be uncollectible. If you’ve made attempts to collect but were unsuccessful, you might consider writing it off as bad debt. Ask yourself, “Do I really think I’ll be able to collect this payment?” If not, it’s time to take categorize the account as bad debt. (There’s a process for this that I’ll explain in the future.)
Old Customer Credit
Second, old customer credits can throw off your Accounts Receivable balance. Customer credits appear as negative numbers on the balance sheet. Review each of these accounts to confirm the credit is valid. Maybe there’s no invoice to credit, and the credit is an error. Maybe the customer hasn’t purchased anything in the past year and is unlikely to purchase anything in the future. In this situation, it’s time to issue a refund. This will clean up your Accounts Receivable and compensate the customer fairly.
Prepayments & Down Payments
Third, review any prepayments or down payments listed in Accounts Receivable. Prepayments and down payments make it look as if your customers overpaid. Some bookkeepers record these in Accounts Receivable and leave them open until they invoice the customer. Actually, there’s a better method to handle prepayments and down payments, which I explain in these videos.
Two Ways to Handle Prepaid Monthly Invoices
QuickBooks Online – Handling Down Payments from Customers
Accounts Receivable Might Be Deceiving
I have described three ways that Accounts Receivable might deceive you. Essentially, you want a clear, accurate picture of how much money your customers owe. Thus, you should watch for old balances, customer credits, and prepayments/down payments. These can throw off your Accounts Receivable and financial statement, making well-informed financial decisions a challenge. For more advice about collecting customer payments, request my free report, “4 Tips You Can Use in the Service Industry to Collect Customer Payments Faster.”