Understanding the Difference Between a ‘Customer’ and ‘Accounts Receivable’ in Accounting Terms

In simple terms, a customer is an individual or business that purchases products or services in exchange for money. They may be regarded as clients, especially in professional services environments. Governments can also be customers if a company is contracted by a governmental body to supply products or services.

Key Terms in Accounting

Customers:

Typically referred to as 'clients' in professional services industries Individuals or businesses that make purchases from your company Usually listed in the 'Customer' tab in accounting software, offering their names and contact information

Accounts Receivable (AR) / A/R:

A financial report that lists all the customers and their outstanding balances at a specific point in time, like today Used for managing collections and overseeing the repayment of amounts owed

Accounts Receivable Explained

Accounts Receivable is a crucial financial metric that helps companies track the money owed to them by customers. This can be broken down into several categories:

Standard Accounts Receivable Reports

Listed customer balances along with the specific date their invoice was issued Helps in managing cash flow by providing a clear overview of all receivables

Accounts Receivable by Aging

Splits customer balances into current and overdue categories based on the time intervals - usually monthly Current receivables are those that are due for payment within a certain period, for example, 30 days Overdue receivables are those that are past the due date, such as those that are 31 to 60 days past the due date

For instance, if a company allows customers to pay within a month, any receivables that are due but not yet paid within that month will be listed under the 'current' category. Overdue receivables will be listed under the corresponding time interval, such as '31 to 60 days.'

Values in the Accounts Receivable Report

ABC Co. owes a total of 62,456, with only 3,335 somewhat overdue Extreme Company owes 18,210, and this amount is overdue by more than 2 months

Importance of Accurate Accounts Receivable Tracking

Accounts Receivable is not just a snapshot of current financial status; it is an asset to a company. Banks may consider AR as collateral for business loans. Proper invoicing and tracking of customer balances can:

Enhance collection efforts Identify and mitigate potential fraud within the company Enable companies to secure necessary business loans

To better manage Accounts Receivable, businesses should focus on:

Generating accurate AR reports Ensuring timely invoicing Implementing effective payment follow-up procedures

Conclusion

By understanding the difference between a customer and Accounts Receivable, businesses can improve their financial management practices. Accurate and timely accounting of receivables is essential for maintaining financial health and securing future business opportunities.

For more information on accounts receivable in accounting terms, refer to the following resources:

Detailed Guide on Accounts Receivable Best Practices for Invoicing and Receivables Management