Week 7 — Accounts Receivable (AR)

Overview

Week Overview

Week 7 introduces the revenue cycle from the customer side: Accounts Receivable (AR). Students learn how to set up customers, issue invoices, record payments, manage customer deposits, and track outstanding balances through the AR ledger and aging report.

Objectives

Weekly Learning Objectives

By the end of this week, students will be able to:

Explain the purpose and function of Accounts Receivable in the revenue cycle.
Set up customer master records with appropriate terms and credit limits.
Prepare and issue accurate customer invoices.
Record customer payments, deposits, and partial payments.
Apply payments correctly to open invoices.
Prepare and interpret an AR aging report.
Identify delinquent accounts and basic collection strategies.
Record customer deposits and understand unearned/deferred revenue.
Reconcile the AR subledger to the general ledger control account.

Concept 1

Introduction to Accounts Receivable

Accounts Receivable represents amounts owed by customers for goods or services sold on credit. AR is a current asset and a key driver of cash flow. Accurate AR records ensure that revenue is recognized correctly (under accrual accounting) and that the business can manage its cash collections effectively.

Students compare cash sales vs credit sales and discuss how AR policies affect liquidity and customer relationships.

Concept 2

Customer Setup & Master Data

Customer records typically include:

Legal name, DBA, and primary contact information.
Billing and shipping addresses.
Preferred invoicing method (email, portal, mail).
Payment terms (e.g., Net 30, Due on Receipt).
Credit limits and credit approval notes.
Tax exemption or resale certificates, if applicable.
Collection notes or special agreements.

Clean customer master data supports accurate billing, reduces disputes, and makes AR aging and collections more reliable.

Concept 3

Invoicing: Creating and Issuing Customer Bills

Students learn how to prepare invoices from sales orders, shipping documents, or service time sheets. A complete invoice includes:

Invoice date and invoice number.
Customer name and billing address.
Description of goods or services, quantities, and unit prices.
Subtotal, sales tax (if applicable), and total amount due.
Payment terms and due date.
Payment instructions (where/how to pay).

Accurate invoicing leads to fewer disputes and faster payment, which directly improves cash flow.

Concept 4

Recording Cash Receipts & Applying Payments

Students practice recording a variety of customer payments, including checks, credit cards, and electronic transfers. They learn to apply payments to specific invoices rather than leaving amounts as unapplied credits.

Example: Full Payment of an Invoice

Customer A pays invoice #1001 for 1,250 by check.

Cash ....................................... Dr 1,250
    Accounts Receivable – Customer A ........... 1,250

Additional scenarios include partial payments, overpayments, and short pays (e.g., due to discounts or disputes), emphasizing the importance of proper application for accurate customer balances.

Concept 5

Customer Deposits & Unearned Revenue

Some businesses collect deposits before providing goods or services. These deposits are recorded as liabilities (unearned revenue) until the work is performed.

Example: Deposit Received

Cash ........................................ Dr 500
    Unearned Revenue (Customer Deposits) ....... 500

Example: Revenue Earned Later

Unearned Revenue ............................. Dr 500
    Service Revenue .............................. 500

Students learn to distinguish between revenue that has been earned and cash that has simply been collected.

Concept 6

AR Subledger & General Ledger Control Account

Each customer has an individual account showing invoices, payments, credit memos, and balance due. Collectively, these accounts make up the AR subsidiary ledger.

The sum of all customer balances must equal the Accounts Receivable control account in the general ledger. Students practice posting transactions to customer accounts and verifying that the subledger and control account match.

Concept 7

Accounts Receivable Aging Analysis

An AR aging report groups customer balances into time buckets such as:

Current
1–30 days past due
31–60 days past due
61–90 days past due
90+ days past due

Students use aging reports to identify overdue accounts, assess collection risk, and prioritize follow-up. The aging can also be used as a starting point for estimating doubtful accounts (introduced conceptually).

Concept 8

Collections & Delinquent Accounts

Students learn a basic, professional collections process:

Friendly reminder when invoices approach or pass due date.
Second notice referencing the past-due balance.
Phone call to resolve disputes or set up a payment plan.
Final notice, potentially including late fees.
Escalation such as credit hold, collections agency, or legal action (high-level).

Emphasis is placed on respectful communication, documentation of contacts, and consistent follow-up.

Activities

In-Class Activities

1. Customer Setup Lab

Students use sample customer data to complete customer setup forms, assign terms and credit limits, and identify missing documentation (such as resale certificates).

2. Invoicing Simulation

Using sales orders, shipping documents, and service time sheets, students prepare customer invoices with correct pricing, taxes, invoice numbers, and due dates.

3. Cash Receipts Posting

Students record a batch of customer payments (checks, EFT, credit cards), apply them to open invoices, and update customer account balances.

4. AR Aging & Collections Prioritization

Given an AR aging report, students identify overdue accounts, prioritize which customers to contact first, and draft a brief collection email or call script.

Homework

Homework Assignments

Assignment 1: Customer setup & payment terms — complete customer profiles and assign appropriate terms/limits.
Assignment 2: Invoice preparation — create invoices from provided sales/source documents.
Assignment 3: Cash receipts journal — record payments and apply them to the correct invoices.
Assignment 4: AR aging report — prepare an aging schedule and answer short analysis questions.

Discussion

Discussion Board Prompt

Why is accurate and timely invoicing essential for business cash flow? What are the consequences of poor AR management (for example, slow collections, frequent write-offs, or customer disputes)?

Quiz

Quiz Topics for Week 7

Purpose of Accounts Receivable.
Key customer setup data fields.
Components of a complete invoice.
Recording and applying cash receipts.
Partial payments, overpayments, and unapplied cash.
Customer deposits vs earned revenue.
AR aging buckets and their interpretation.
Basic collections strategies and credit holds.

Summary

Week 7 Summary

Week 7 teaches students how to manage Accounts Receivable from customer setup and invoicing through payment application and collections. Effective AR processes protect cash flow, reduce write-offs, and support strong, long-term customer relationships.

In the following weeks, these skills will connect to topics like bad debt, allowances, and more advanced revenue recognition.