Accounts Receivable: The Complete Procedure Every Business Should Follow
Accounts Receivable (AR) is the lifeline of a business’s cash flow. It represents the money owed to a company by its customers for goods or services provided on credit. An efficient accounts receivable process ensures timely collections, reduces bad debts, and strengthens financial stability.
In this blog, we’ll explain the complete accounts receivable procedure step by step.
What Is Accounts Receivable?
Accounts Receivable refers to outstanding invoices or payments a company expects to receive from customers. It is recorded as a current asset on the balance sheet because it represents incoming cash.
The Complete Accounts Receivable Procedure
Below is the standard end-to-end AR process followed by most organizations:
1. Customer Onboarding and Credit Approval
Before extending credit, businesses should evaluate the customer’s creditworthiness.
This step includes:
Collecting customer details
Verifying business credentials
Setting credit limits
Defining payment terms (e.g., 15, 30, or 60 days)
Purpose:
To minimize the risk of non-payment.
2. Sales Order Creation
Once a customer places an order, a sales order is generated. It includes:
Product or service details
Quantity
Price
Delivery terms
Payment terms
This document serves as the basis for fulfilling the order.
3. Delivery of Goods or Services
The business delivers the product or completes the service as agreed. Proof of delivery (POD) or service confirmation is documented.
This ensures there is evidence that the customer received what was promised.
4. Invoice Generation
After delivery, an invoice is created and sent to the customer. The invoice typically includes:
Invoice number
Invoice date
Due date
Description of goods/services
Amount payable
Payment instructions
Timely invoicing is critical for faster collections.
5. Recording the Invoice
Once issued, the invoice is recorded in the accounting system:
Debit: Accounts Receivable (Asset)
Credit: Sales/Revenue
This entry reflects the amount owed by the customer.
6. Payment Tracking
The AR team monitors outstanding invoices using:
Aging reports
Customer statements
Automated tracking systems
Invoices are categorized as:
Current
30 days overdue
60 days overdue
90+ days overdue
Regular monitoring prevents overdue accounts from escalating.
7. Payment Reminders and Follow-Up
If payment is not received by the due date, follow-up actions are initiated:
Friendly reminder emails
Phone calls
Resending invoice copies
Sending account statements
Consistent follow-up improves collection rates.
8. Payment Receipt
When payment is received through bank transfer, cheque, or online payment:
The payment is verified
It is matched against the correct invoice
A receipt confirmation may be sent to the customer
9. Recording the Payment
The accounting entry for received payment:
Debit: Bank/Cash
Credit: Accounts Receivable
This clears the outstanding balance.
10. Handling Disputes and Adjustments
Sometimes customers dispute invoices due to:
Pricing differences
Damaged goods
Incorrect quantities
In such cases:
The issue is investigated
Credit notes or adjustments are issued if necessary
Records are updated accordingly
Proper documentation is essential.
11. Managing Bad Debts
If payment remains uncollectible after multiple attempts:
The account may be sent to collections
Legal action may be considered
The amount may be written off as bad debt
Entry for write-off:
Debit: Bad Debt Expense
Credit: Accounts Receivable
Best Practices for Effective Accounts Receivable Management
To optimize AR procedures, businesses should:
Perform credit checks before approval
Send invoices immediately after delivery
Use automated invoicing systems
Monitor aging reports regularly
Establish clear payment terms
Offer multiple payment options
Follow up consistently and professionally
Automation significantly reduces manual errors and speeds up collections.
Why a Strong AR Process Matters?
A structured accounts receivable procedure helps businesses:
Improve cash flow
Reduce bad debts
Strengthen customer relationships
Enhance financial forecasting
Maintain accurate financial records
Efficient AR management directly impacts profitability and business growth.
Final Thoughts
Accounts receivable is not just about collecting payments — it is a strategic financial function that protects revenue and supports business stability.
By implementing a complete and disciplined AR procedure, businesses can maintain steady cash flow, minimize risk, and create a strong financial foundation for long-term success.
If your receivables are growing faster than your collections, it may be time to review and strengthen your accounts receivable process.
