Payment terms

Accounts receivable (A/R)

Accounts receivable (A/R) is one of a series of accounting transactions dealing with the billing of a customer for goods and services they have ordered.

In most business entities, accounts receivable is typically executed by generating an invoice and either mailing or electronically delivering it to the customer, who, in turn, must pay it within an established timeframe, called credit terms or payment terms. Accounts receivable departments use the sales ledger.

Payment terms

An example of a common payment term is Net 30, which means that payment is due at the end of 30 days from the date of invoice. The debtor is free to pay before the due date; most business entities offer a discount for early payment. Other common payment terms include Net 45 and Net 60.

Booking a receivable is accomplished by a simple accounting transaction; however, the process of maintaining and collecting payments on the accounts receivable subsidiary account balances can be a full-time proposition. Depending on the industry in practice, accounts receivable payments can be received up to 10 - 15 days after the due date has been reached. These types of payment practices are sometimes developed by industry standards, corporate policy, or because of the financial condition of the client.

Since not all customer debts will be collected, businesses typically record an allowance for bad debts which is subtracted from total accounts receivable. When accounts receivable are not paid, some companies turn them over to third party collection agencies or collection attorneys who will attempt to recover the debt via negotiating payment plans, settlement offers or pursuing other legal action.

Outstanding advances are part of accounts receivable if a company gets an order from its customers with payment terms agreed upon in advance. Since billing is done to claim the advances several times, this area of collectible is not reflected in accounts receivables. Ideally, since advance payment occurs within a mutually agreed-upon term, it is the responsibility of the accounts department to periodically take out the statement showing advance collectible and should be provided to sales & marketing for collection of advances. The payment of accounts receivable can be protected either by a letter of credit or by Trade Credit Insurance.

Electronic billing

Electronic billing is the electronic delivery of invoices (bills) and related information by a company to its customers. Electronic billing is referred to by a variety of terms, including the following:

• EBPP — electronic bill presentment & payment (typically focused on business-to-consumer billing and payment)
• EIPP — electronic invoice presentment and payment (typically focused on business-to-business billing and payment)
• eBilling
• eInvoicing
• ePayables
• electronic invoicing

While there are current efforts to standardize systems for electronic billing and invoicing, there is currently a wide variety of options for businesses and consumers.

Accounts payable

Accounts payable is a file or account that contains money that a person or company owes to suppliers, but has not paid yet (a form of debt), sometimes referred as trade payable. When an invoice is received, it is added to the file, and then removed when it is paid. Thus, the A/P is a form of credit that suppliers offer to their purchasers by allowing them to pay for a product or service after it has already been received.

In households, accounts payable are ordinarily bills from the electric company, telephone company, cable television or satellite dish service, newspaper subscription, and other such regular services. Householders usually track and pay on a monthly basis by hand using cheques or credit cards. In a business, there is usually a much broader range of services in the A/P file, and accountants or bookkeepers usually use accounting software to track the flow of money into this liability account when they receive invoices and out of it when they make payments. Increasingly, large firms are using specialized Accounts Payable Automation to automate the paper and manual elements of processing an organization's invoices.