Managing bills receivable is critical to a business’s financial planning–interruption-free flow of working capital and smooth business operations. As 44% of startups failed due to running out of cash, tracing back to poor financial planning, you cannot afford to neglect a major funding source–bills receivable.
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That’s why we have brought you this extensive yet actionable guide on bills receivable meaning to help you sort your bills receivable. We have covered the key advantages of bills receivable, probable risks involved, their types, the next steps of a dishonored bill, and the bill receivable account format.
What Is a Bill Receivable?
Bills receivable are proof of debt and a legal contract between the seller and buyer for debt recovery. They are bills of exchange that vendors draw on their customers or buyers. That means when the customer (drawee) acknowledges and formally accepts the bill receivable and sends it back to the vendor (drawer), it instantly becomes a bill receivable for the drawer.
The amount mentioned on the bill receivable is the money owed to the seller or drawer and payable to the customer or drawee as it is a liability for them.
Considering the high number of bills receivables, you cannot manually cater to all the billing intricacies and ensure well-recorded financial statements. It is an exhausting process and can consume most of the time, with inaccuracies seeping in. Tackle this by leveraging the advanced accounting automation software that automates operational tasks and streamlines your accounting process.
What Are the Key Advantages of Bills Receivable?
39% of invoices are paid late in the US. Bills receivable can change that. Maintaining bills receivable can help you keep a centralized record of all the payments yet to be received. Here are some other advantages of bills receivable –
1. Higher Chances of Bill Clearance
Bills receivable is a legal contract between the vendor and customer, compelling the customer to make payment on or before the mentioned date. Non-adherence can lead to legal actions.
2. Fixed Payment Cycle
The payment terms with the due date are stated in the bills receivable, which the customer or drawee has to follow. This ensures a seamless payment flow, helping you create budgets, plan your finances better, and control your business’s cash flow.
3. Financial Bonus
Financial bonus is accompanied by bills receivable as additional interest is added to its amount (varies with agreed terms). This is a lucrative deal for creditors to earn extra revenue on the amount lent.
4. Additional Source of Financing
Bills receivable are an asset for the business. So, businesses can keep them as collateral to finance loans from financial institutions without the need to struggle for finances or sell an asset.
5. Lower Financial Risk
Such bill receivable facilitates security and lowers financial risk for the seller or creditor by asking the customer or drawee to secure bills receivable with personal guarantees or collateral. Doing so frees businesses from the fear of non-payment from less creditworthy customers.
What Are the Possible Risks of Bills Receivable?
There are numerous benefits of bill receivables, but they come with their risks too. Here are, thus, the top 7 bills receivable risks for you to avoid or overcome –
1. Risk of Default
The possibility of the debtor not paying the bill receivable due to inability or unwillingness, leading to the creditor’s loss.
2. Risk of Liquidity and Opportunity Cost
A bill receivable blocks your funds till their maturity, revoking your access to funds and potential to leverage investment opportunities.
3. Interest or Exchange Rate Fluctuations
This is a bills receivable risk that can affect the creditor’s return. If the interest or exchange rate rises, the pre-decided interest will no longer be lucrative.
4. Dispute Risk
Dispute risks may occur if you haven’t clearly stated your terms. You’ll need to take legal action to impose the obligation on the customer, wasting resources.
5. Bad Debts
Shifts in market or industry conditions can lower the customer’s potential to make repayments, leading to bad debt on the creditor’s end.
6. Unanticipated Cost Risk
Bills receivables or accounts receivable involve unforeseen costs as the funds required to administrate the due dates, payments, and documentation are an additional cost and never fixed.
What Are the Different Types of Bills Receivable?
Receivable bills or receivable transactions are treated differently in different scenarios in the business.
Note: The accounting treatment of bills receivable involves elaborate processes, but you can eliminate those with accounting automation software.
Here are different types of bill receivables that you must know about –
1. Creating Bills Receivable
Creditors create payments receivable. This process involves issuing negotiable instruments–bills of exchange or promissory notes to debtors, signifying a debt they need to repay as per the terms mentioned. These instruments, aka documents, define the transaction terms, receivable amount, payment due date, and interest levied (if applicable).
You may create payments receivable for all bills–unsigned, signed, or purchase-issued on your own, with a bills receivable window or by modifying a pre-created bill listed in the transaction window under the bills receivable window. You can also rely on bills receivable batch creations if you have multiple bills to cater to.
2. Remitting Bills Receivable
To remit a bill receivable is to pass on the responsibility of its collection to a financial institution or bank by physically sending the bills of exchange and promissory notes to the institution.
3. Managing Bills Receivable
Bills receivable management refers to all the steps taken to ensure a seamless payment collection process. Some of the crucial steps include –
- Maintaining centralized and detailed records of the bills receivable
- Monitoring their due dates
- Reminding the debtors for payment
- Sending out regular follow-ups for delayed payments
4. Identifying and Resolving the Reason for Delays
Robust management lowers the risk of bad debts and ensures enhanced cash flow management. For better management, you can use a bills receivable portfolio management window to monitor your bills receivable batch creations/individual bills or log changes as the payments are cleared.
With this bills receivable portfolio management window, you can track each invoice’s lifecycle, endorse or mark invoices as outstanding/contested/canceled, retrieve remitted invoices, add or remove on-hold invoices, access invoice data, and more.
5. Bills Receivable in Balance Sheet
The bills receivables that a company draws on its customers are recorded as assets in its balance sheet. These bills are categorized as short-term assets if they are to be cleared within one year and long-term if they are to be cleared after one year.
6. Accounting or Magazine Entries for Bills Receivable
When a company creates bills receivable and further draws them in favor of the customer, it passes some entries to record the transaction and show its collection (when that happens) in the books of accounts.
What Happens When Bills Receivable are Dishonoured?
A bill receivable is said to be dishonored when the customer or drawee doesn’t settle the amount or clear the bill on the agreed/maturity date. When this happens, the pending amount is transferred to the accounts receivable A/C, and the noting charges are cleared by the customer on behalf of the business.
In case of a bill receivable dishonor, the vendor passes these entries in their books –
- Accounts receivable A/C Dr.
- Bills receivable A/C Cr.
- Charges Cr.
Bills Receivable Account Format
Bills receivable or accounts receivable are recorded in the business’s books of account chronologically. When a credit sale happens, the business draws a bill in the customer’s name for a pre-decided time frame. Accepted bills receivable are accounts receivable for the business and bills payable for the customer.
Here’s the format of the bills receivable account –
- Date: Records the date of acceptance of the bill.
- Party from whom received: Shows the customer or debtor’s name who accepts the bill and promises to pay.
- Term of the bill: This column specifies the period for which the bill is drawn–one month, two months, 60 days, 90 days, or whatever.
- Due date: It is the date of the bill’s maturity on which the payment becomes due. Due date plus 3 days grace is the term of the bill.
- Ledger Folio: The LF shows the page number on which the customer’s ledger account is recorded.
- Amount of the bill: This column specifies the actual amount of the bills receivable due from the customer.
- Remark: Lastly, the remark column records the bill’s disposal details–discounted, endorsed, honored, or dishonored.
Example of Bills Receivable
To understand bills receivable better, let’s take a bills receivable example.
For instance, your company LMN Limited, makes credit sales of goods to a customer HIG Limited.
To record this transaction and ensure the clearance of the bill, your company LMN Limited will create and draw a bill receivable on HIG Limited. Your company LMN Limited, needs to mention the payment terms in the bill–Rs. 50,000 to be paid within 30 days from the date of the bill receivable.
For this example, we have assumed the principal amount to be 50,000 (owed amount) and the due date to be 30 days after the date of the bill receivable.
Here’s what the bill receivable format must look like –
(Your company name)
(City, State, ZIP)
Principal amount: 50,000
Date of note: (Date of the note)
Due date: (Due date + 30 days)
For the pre-received goods, I, (customer’s name), promise to pay to (your company name), the principal amount of fifty thousand rupees (50.000) on or before (due date+30 days).
In case of default, I, (customer’s name), agree to pay all the collection charges, attorney fees, and court charges.
(City, State, ZIP)
How is a Bill Receivable Recorded in Accounting?
A bill receivable or accounts receivable in accounting originates when a credit sale happens, and a bill is documented to be drawn on the customer. Let’s dive deep into the details of the accounting process that happens after that –
1. Pass the Bills Receivable Journal Entry
Suppose ABC Limited makes a credit sale of Rs.10,000 and draws a bill receivable of the same amount on DEF Limited with a due date of 2 months after the sale. Here are all the journal entries you must pass for this bill receivable.
- Credit sale
- Account receivable Dr. 10,000
- Sale Cr. 10,000
- Drawing bills receivable
- Bills receivable Dr. 10,000
- Account receivable Cr. 10,000
- Bill honoring after two months
- Bank Dr. 10,000
- Bills receivable Cr. 10,000
- Dishonored bill on maturity
- Account receivable Dr. 10,000
- Bills receivable Cr. 10,000
- ABC Limited discounts the bill with a financial institution/bank
- Bank Dr. 9,500
- Discount charges Dr. 500
- Bill receivable Cr. 10,000
These entries might seem overwhelming to make for all the bills due to the required number and level of accuracy. You can skip that with accounting tools. It streamlines the bill recording process after you enter the relevant details–transaction, customer, amount, terms, and due date. Not only that, but it also generates relevant journal entries automatically with the highest accuracy.
2. Create an Accounts Receivable Ledger
After the journal entries in the books of ABC Limited, they’ll start making ledger accounts for bills or account receivable following the abovementioned format. This way, they can easily track all the account receivable with the relevant details.
3. Track and Report Bills
ABC Limited must check their bills receivables or account receivable progress when the due date arrives. If cleared, the account receivable balance is reduced; if not, send reminders or follow-ups to compel DEF Limited to make payments.
4. Collect the Bill Amount and Reconcile the Book
When the bills are cleared, pass a journal entry to record the receivable transactions or receivable accounts. Here, the bills receivable accounts balance will decrease, and the cash or bank balance will increase.
5. Prepare Financial Statements
After passing all the entries of the receivable accounts, making the ledger, and reconciling the books of accounts, it’s time to prepare ABC Limited’s financial statement–balance sheet.
The balance sheet shows the outstanding accounts receivable. The short-term bill receivable (due within one year) is written under current assets in the balance sheet, and long-term bills receivable (due after one year) under non-current assets in the balance sheet.
We understand this is an extensive and time-consuming process. Also, 60% of small businesses believe they are less equipped in accounting and finance niches. If you’re one of them, shift to the best accounting software so you don’t have to perform repetitive tasks or compromise the accuracy of your account receivable entries.
Receivable bills or receivable transactions brightens your chances of receiving your payment and lowers the risk of bad debts due to unforeseen reasons. Remember, if bills of exchange receivable debts are not cleared or the bill is dishonored, you lose your chance of receiving the payment of the sale made.
But we understand how intense, complex, and taxing it is to manually send receivable bills or collect receivable transactions. That’s why we recommend relying on billing software to complete the process without much effort. Invest in billing software today!
You may create the bill receivables from the new bills receivable window, modify a pre-created bill in the transaction section, or create bill receivable in batches by utilizing bills receivable transaction batches or the bills receivable transaction batches creations concurrent application.
When a credit sale happens, the drawer (seller) creates and sends receivable bills in favor of the drawee (customer) as proof of debt to be made clear on the due date. Accepted bills receivable become legally binding on the buyer.
- Prepare the concerned customers
- Assign receipt methods to create invoices for all payments receivables transaction
- Determine transactions required for bills receivable transaction batches creation
- Set up client’s/customer’s bank account.
Hiba is an accomplished specialist in writing for Software as a Service (SaaS) and has extensive experience crafting compelling and informative content. With over two years of experience, she has honed her skills in producing various forms of content, including articles, blog posts, and more, all centered around SaaS. Hiba is dedicated to sharing her insights to assist businesses in leveraging SaaS to achieve growth and success.