Accounts Receivable Process - Definition - Meaning - Steps - Explanation

Here we focus on Credit Sales process or Accounts Receivable Process which is based on Sales made on account or credit basis. we already know about Accounts Receivable who bought goods from company on credit basis and agree to pay at a specified time period, usually within one month.

What is Accounts Receivable Process

It is a process in which goods / products sold or services rendered to customers on Credit Basis or On Account agreed upon under the Contract of Sale.

We can state Accounts Receivable Process or Creating a Credit Sales Processing in the below mentioned Steps:

1. Establishing Business Transaction Between Seller And Buyer (Contract of Sale)

Every Sales made is started with an oral or a written order received from the customer (buyer). This order can be given either by physically visiting to the location of business or through electronic mediums like fax, Email, Online Shop, etc. Then an invoice is issued against the order received. Three copies are generated for this Sales Invoice. One copy is sent to customer for his personal records. Second copy is sent to Accounting Department for recording Credit Sales. Third copy is retained by Sales Department for its own personal records and other purposes. Additional Copies of Sales invoice is also generated for shipping department and for bank use.

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2. Recording of Business Transactions in the Books of Accounts

The accounting department keeps Subsidiary Ledgers of customers and then post all the transactions to Principal, Main or Control Accounts Receivable / Debtor’s Ledger Account in order to keep records of any credit sale made with all the customers. The Ending Balance of Accounts Receivable is transferred to Balance Sheet.

3. Delivery of Goods / Products Ordered

After recording Business Transactions related to Credit Sales in Sales Day Book and Accounts Receivable T account or Ledger, the goods are dispatched and delivered to customers / buyers. The Delivery charges is borne either by seller or buyer written on terms and agreed on both parties during the agreement of Sale. Mostly, it is written the word “Free Shipping” is used in case of free delivery, otherwise, it is written as Total cost + Shipping Cost / Delivery Cost.

If the seller bornes the Delivery costs, then it is a Selling Expense and named as “Carriage Outward, Delivery Expense in the Income Statement / Profit And Loss Account. If the delivery charges is to be borned by buyer, then the seller provides detail about delivery charges on Sales Invoice and it is added to the selling price of purchased goods.

So, we can say that Accounts Receivable Process is made in order to make Credit Sales of the business by establishing a Contract or Agreement of Sale.