Accounts Receivable and Payable

Introduction

Accounts receivable and accounts payable are central components of the accounting cycle and working-capital management. Accounts receivable represent amounts owed to an enterprise by customers who have purchased goods or services on credit. Accounts payable represent amounts owed by the enterprise to suppliers for goods or services purchased on credit. Although both are forms of short-term credit, they have different accounting, operational and control implications.

In a computerised accounting system such as Tally, recording only the total balance of a customer or supplier is often insufficient. An organisation also needs to know which invoice is unpaid, when it is due, whether an advance exists, how much has been settled, and which balances require follow-up. This detailed tracking is known as bill-wise accounting.

Effective receivables and payables management improves cash flow, reduces errors, supports supplier relationships, limits credit losses and provides reliable information for decision-making. This chapter explains the concepts and practical procedures required to manage these balances in an accounting system.

Learning Objectives

After studying this chapter, the learner should be able to:

1. Explain the nature and importance of accounts receivable and accounts payable.
2. Distinguish credit sales, credit purchases, advances, bills and settlements.
3. Configure and use bill-wise details in a Tally-based accounting system.
4. Record credit terms, due dates, part receipts and part payments.
5. Prepare and interpret outstanding and ageing reports.
6. Reconcile customer and supplier balances.
7. Apply basic credit-control and payment-control procedures.
8. Identify important ethical, control and data-governance issues.

1. Fundamental Concepts

1.1 Accounts receivable

When goods or services are sold on credit, the seller records a receivable. The customer becomes a debtor until payment is received or the balance is otherwise settled.

For a credit sale, the basic entry is:

Debit: Customer account

Credit: Sales or service revenue account

The debit records the amount recoverable from the customer. A receivable is normally classified as a current asset when collection is expected within the normal operating cycle or within twelve months, subject to the applicable accounting framework.

1.2 Accounts payable

When goods or services are purchased on credit, the buyer records a payable. The supplier is a creditor until the amount is paid or adjusted.

For a credit purchase, the basic entry is:

Debit: Purchase, inventory or expense account

Credit: Supplier account

A payable is normally classified as a current liability when it is expected to be settled within the normal operating cycle or within twelve months.

1.3 The distinction between account balance and bill balance

A ledger balance shows the net amount due from or to a party. A bill-wise record goes further by identifying the individual transactions making up that balance.

For example, a customer may have:

• Invoice INV-101: 20,000, due 15 April
• Invoice INV-108: 12,000, due 30 April
• Receipt allocated to INV-101: 10,000

The customer’s net outstanding balance is 22,000, but the bill-wise record shows that INV-101 is partly unpaid and INV-108 is wholly unpaid. This distinction is essential for collection follow-up and accurate ageing.

2. Credit Terms and Due Dates

Credit terms define when payment is expected and whether incentives or penalties apply. Common terms include:

• Immediate payment: payable on delivery or invoice date.
• Net 30: full payment is due 30 days after the invoice date.
• Cash discount terms: for example, “2/10, net 30,” meaning a 2% discount is available if paid within 10 days; otherwise the full amount is due within 30 days.
• Credit limit: the maximum permitted outstanding exposure to a customer.
• Grace period: an additional period allowed before an account is treated as overdue.

A simple due-date calculation is:

The credit period is measured in calendar days unless the organisation’s policy specifies business days or another convention. The calculation must also consider contractual terms, holidays, tax rules, and system settings.

For an invoice dated 1 March with terms of net 30, the due date is generally 31 March if the invoice date is treated as day zero. Organisations should apply one consistent convention and disclose it in their procedures.

A discount under terms “2/10, net 30” is calculated as:

For an invoice of 50,000, the discount is 50,000 × 2% = 1,000. The amount payable within the discount period is 49,000. The discount should be recorded according to the organisation’s accounting policy and applicable tax requirements.

3. Bill-Wise Accounting in Tally

3.1 Meaning and purpose

Bill-wise accounting links receipts and payments to particular invoices or reference numbers. It allows the system to identify:

• outstanding invoices;
• due and overdue amounts;
• partly settled bills;
• advances received or paid;
• credit notes and debit notes;
• the age of each balance; and
• the allocation history of receipts and payments.

In Tally, bill-wise details are generally enabled for relevant parties and maintained through party ledgers. The exact menu names may vary by product version and configuration, but the accounting logic remains the same.

3.2 Reference types

A bill-wise system normally uses reference types such as:

The labels may differ between systems. The accounting officer should understand the meaning rather than rely only on menu terminology.

3.3 Enabling bill-wise details

A practical configuration sequence is as follows:

1. Open the company’s accounting features.
2. Enable bill-wise details for receivables and payables.
3. Open the relevant customer or supplier ledger.
4. Set the party as bill-wise applicable where required.
5. Enter credit period, credit limit and other approved terms.
6. Save the configuration and test it with a controlled transaction.

Configuration should be performed by an authorised user. Changes to credit limits, credit periods and bill-wise settings should be documented because they affect reports and internal controls.

3.4 Recording a credit sale

Suppose Bright Office Supplies sells goods on credit to Asha Traders for 40,000 on 5 June, with payment due in 30 days.

The transaction records:

• customer: Asha Traders;
• invoice number: the approved sales invoice number;
• invoice date: 5 June;
• amount: 40,000;
• reference type: new reference; and
• due date: 5 July, subject to the organisation’s date convention.

The accounting entry is:

Debit: Asha Traders 40,000

Credit: Sales 40,000

If tax is separately recorded, the customer’s total debit includes the invoice total, while sales and tax accounts are credited according to the invoice structure.

3.5 Recording a credit purchase

If Bright Office Supplies purchases inventory worth 25,000 from Metro Wholesalers on 15 June, payable in 45 days, the system records a new reference against Metro Wholesalers.

The entry is:

Debit: Inventory or purchases 25,000

Credit: Metro Wholesalers 25,000

The supplier invoice number should be entered accurately. Duplicate supplier invoice numbers should be blocked or reviewed because duplicate recording can overstate liabilities and expenses.

4. Advances, Receipts and Payments

4.1 Customer advances

A customer advance is money received before the related sale or service is completed. It is not automatically revenue. Until the performance obligation is satisfied, it is generally treated as a liability or advance from customer, subject to the applicable accounting framework.

For a customer advance of 10,000:

Debit: Bank 10,000

Credit: Customer advance or customer account 10,000

The reference should be marked as an advance unless a valid invoice already exists. When the invoice is later raised, the advance can be adjusted against it.

4.2 Supplier advances

A supplier advance is money paid before goods or services are received. It is generally recorded as an advance to supplier or other current asset until adjusted against the supplier’s invoice.

For an advance of 8,000:

Debit: Supplier advance 8,000

Credit: Bank 8,000

When the supplier invoice is received, the advance is allocated against the invoice. The remaining amount, if any, becomes payable.

4.3 Receipt against a specific invoice

Assume Asha Traders pays 15,000 against invoice INV-245 of 40,000. The entry is:

Debit: Bank 15,000

Credit: Asha Traders 15,000

The bill-wise allocation is made against INV-245. The unpaid amount is:

Thus, unpaid amount = 40,000 − 15,000 = 25,000.

The invoice is classified as partly settled, not fully settled.

4.4 Payment against a supplier invoice

If the enterprise pays 20,000 against a supplier invoice of 25,000, the supplier account is credited through the payment entry and the amount is allocated against that invoice. The remaining payable is 5,000.

4.5 On-account receipts and payments

An on-account receipt is not linked to a particular invoice. It may be appropriate when a customer pays a consolidated amount and remittance details have not yet been received. However, on-account balances should not remain unresolved indefinitely. A reconciliation officer should obtain supporting information and allocate the amount promptly.

5. Credit Notes, Debit Notes and Adjustments

A credit note issued to a customer may reduce the customer’s receivable because of returns, discounts, short supply or pricing correction. A debit note received from a supplier may increase the payable or record a claim, depending on the transaction.

Adjustments must be supported by:

• the original invoice;
• authorisation for the adjustment;
• reason and amount;
• tax treatment where relevant; and
• clear bill-wise allocation.

A credit note should not be used to conceal an unauthorised write-off. Similarly, a debit note should not be recorded merely to increase a supplier balance without documentary evidence.

6. Outstanding Reports and Ageing Analysis

6.1 Outstanding report

An outstanding report lists unpaid or partly unpaid invoices and related references. Useful fields include:

• party name;
• invoice number;
• invoice date;
• due date;
• original amount;
• amount received or paid;
• balance outstanding;
• days outstanding; and
• ageing category.

The report may be prepared for customers, suppliers, sales staff, branches, cost centres or selected dates.

6.2 Ageing analysis

Ageing classifies balances according to the time elapsed since the due date or invoice date. A typical schedule is:

The policy must state whether ageing is based on invoice date or due date. Due-date ageing is generally more useful for credit control because it distinguishes an unpaid but not-yet-due invoice from an overdue invoice.

If the reporting date is 31 August and an invoice was due on 1 August, the overdue period is 30 days under a date-difference convention. The system’s treatment of inclusive and exclusive dates should be applied consistently.

A simple collection ratio may be used as an internal indicator:

This ratio is meaningful only when the numerator and denominator are defined consistently. It should not be interpreted as a complete measure of credit performance because timing, disputes and credit terms affect the result.

6.3 Days sales outstanding

At a basic analytical level, days sales outstanding (DSO) estimates the average number of days taken to collect credit sales:

Average accounts receivable is commonly calculated as opening receivables plus closing receivables divided by two. The formula assumes that credit sales are available, the period is defined, and seasonal effects are understood. DSO is an indicator, not proof of collection efficiency.

For example, if average receivables are 300,000, annual net credit sales are 3,000,000 and the period contains 365 days:

DSO = 300,000 ÷ 3,000,000 × 365 = 36.5 days.

7. Settlement and Reconciliation Procedures

Settlement means clearing a receivable or payable through cash, bank transfer, adjustment, return, credit note, debit note or approved write-off.

A sound reconciliation process includes:

1. Obtain the customer or supplier statement.
2. Compare it with the ledger and bill-wise report.
3. Match invoice numbers, dates and amounts.
4. Identify missing invoices, unallocated receipts, duplicate entries and timing differences.
5. Investigate disputes and obtain evidence.
6. Record authorised adjustments.
7. Confirm the closing balance with the counterparty where appropriate.
8. Document unresolved items and assign responsibility.

Bank receipts should be matched to customer remittances. A receipt should not be allocated to the wrong invoice merely to make an old balance appear settled. Where a customer pays several invoices in one amount, allocation should follow the remittance advice or documented allocation policy.

8. Basic Credit Control

Credit control is the process of assessing customers, setting terms, monitoring exposure and collecting amounts due. Important controls include:

Before granting credit

• verify customer identity and legal details;
• assess financial capacity and payment history;
• establish a credit limit;
• define payment terms in writing;
• obtain approval from an authorised officer; and
• separate customer creation from credit approval where possible.

During the credit period

• review outstanding reports regularly;
• monitor orders that would exceed the credit limit;
• contact customers before or immediately after the due date;
• record disputes separately from ordinary overdue balances; and
• suspend further credit when policy thresholds are breached.

For payables control

• verify supplier invoices against purchase orders and goods received;
• prevent duplicate invoice recording;
• maintain an approved payment schedule;
• take valid early-payment discounts when financially beneficial; and
• pay according to agreed terms without manipulating dates.

A basic credit exposure calculation is:

This is a management measure rather than a universal accounting formula. Its usefulness depends on complete data and a clear definition of committed orders and approved credits.

9. Internal Control, Ethics and Governance

Receivable and payable records are vulnerable to fraud and error. Common risks include fictitious customers, unauthorised credit notes, duplicate payments, diversion of receipts, concealed overdue balances and alteration of due dates.

Recommended controls include:

• segregation of duties among sales approval, invoicing, receipt handling and ledger maintenance;
• role-based access to accounting software;
• approval workflows for credit limits, write-offs and adjustments;
• sequential invoice numbering;
• audit trails for edited or deleted transactions;
• regular review of dormant and negative balances;
• independent bank and supplier reconciliations; and
• secure backups and retention of source documents.

Ethically, staff must present overdue amounts honestly, avoid inappropriate allocation of receipts, protect customer and supplier information, and report suspected manipulation. A system report is not automatically reliable merely because it is computer-generated; the underlying entries and master data must be controlled.

10. Technology and Contemporary Practice

Modern accounting systems increasingly integrate invoicing, inventory, banking, customer relationship management and payment gateways. Automated reminders can improve collection timing, while dashboards can display overdue balances and credit-limit utilisation.

Artificial intelligence may assist with cash-application suggestions, duplicate-invoice detection, payment prediction and anomaly identification. Such tools should support, not replace, professional review. Risks include incorrect matching, biased risk scoring, poor-quality training data, privacy breaches and unexplained recommendations. Human approval, audit trails and access controls remain necessary.

Electronic invoices and digital payment records improve traceability, but they also require controls over authentication, retention, system availability and cyber security. Tax and record-retention requirements vary by jurisdiction and must be followed.

11. Illustrative Case: Sunrise Furniture

Background

Sunrise Furniture sells to retailers on 30-day credit and purchases materials from several suppliers. It previously maintained only party-level balances. As a result, receipts were frequently posted on account, overdue invoices were difficult to identify, and supplier payments were sometimes made twice.

Problem

At 30 June, the ledger showed that retailer Alpha Stores owed 120,000. Investigation revealed three invoices:

The net balance is 40,000 + 20,000 − 20,000 = 40,000. The previous report was misleading because an unidentified receipt had not been allocated correctly.

Analysis

The company also discovered that one supplier invoice had been entered twice. The duplicate inflated payables and could have led to an unnecessary payment. The absence of bill-wise references prevented quick identification.

Approach

Sunrise implemented the following measures:

1. Enabled bill-wise tracking for all credit customers and suppliers.
2. Required invoice numbers and due dates for new references.
3. Required remittance advice before allocating consolidated receipts.
4. Introduced a weekly overdue report.
5. Established credit limits and escalation rules.
6. Added a three-way check of purchase order, goods receipt and supplier invoice.
7. Restricted credit-note and write-off permissions.
8. Reconciled opening balances before activating the new process.

Outcome

The company obtained a reliable invoice-level view of receivables and payables, reduced unidentified receipts, prevented duplicate supplier payments and improved collection discussions with customers. Management could distinguish genuine disputes from ordinary overdue accounts.

Learning points

The case demonstrates that bill-wise accounting is not merely a data-entry feature. Its value depends on accurate master data, disciplined allocation, documented credit terms, regular reconciliation and management action based on reports.

12. Limitations and Common Errors

Bill-wise systems do not solve every accounting problem. Incorrect opening balances, wrong invoice dates, duplicate references, unallocated receipts and poor user discipline can make reports unreliable. Ageing reports may also be distorted by disputed invoices, credit notes entered late or advances left uncleared.

Common errors include:

• recording a customer advance as sales;
• treating a supplier advance as an expense;
• allocating one receipt to the wrong invoice;
• using on-account entries as a permanent substitute for reconciliation;
• ignoring credit notes when analysing balances;
• changing due dates without approval; and
• assuming that a positive customer balance always means the customer owes money. A credit balance may represent an advance or overpayment.

The remedy is not simply more software. It is a combination of clear procedures, trained personnel, review controls and reliable source documentation.

Best-Practice Checklist

Before closing a reporting period, the accounting officer should confirm that:

• all credit invoices have valid references;
• due dates agree with approved terms;
• receipts and payments are allocated correctly;
• advances are separately identifiable;
• credit notes and debit notes are authorised;
• overdue balances have been reviewed;
• customer and supplier statements have been reconciled where necessary;
• duplicate invoices have been investigated;
• credit-limit exceptions are documented; and
• reports and supporting records are securely retained.

Chapter Summary

Accounts receivable are amounts due from customers, while accounts payable are amounts owed to suppliers. Credit transactions create party balances, but bill-wise accounting identifies the individual invoices, due dates, settlements and remaining balances that make those totals useful for control.

A Tally-based system can record new references, allocate receipts and payments against bills, identify advances, and produce outstanding and ageing reports. Accurate due dates depend on properly recorded credit terms. Receipts and payments must be allocated carefully, while on-account amounts should be investigated and cleared promptly.

Ageing analysis supports collection and payment planning, and indicators such as DSO provide supplementary management information. Effective control requires credit approval, segregation of duties, invoice verification, reconciliation, audit trails and ethical handling of adjustments. Technology and AI can improve automation, but human review, privacy and governance remain essential.

Key Terms

Accounts payable: Amounts owed by an enterprise to suppliers or other creditors.

Accounts receivable: Amounts owed to an enterprise by customers or other debtors.

Advance: Money received or paid before the related invoice or performance is completed.

Ageing analysis: Classification of outstanding balances by time elapsed since invoice or due date.

Against reference: Allocation of a receipt or payment to an existing bill.

Bill-wise accounting: Recording and monitoring transactions by individual invoice or bill reference.

Credit control: Procedures for approving, monitoring and collecting credit balances.

Credit limit: Maximum approved exposure permitted for a customer.

Credit note: Document reducing an amount previously invoiced, subject to authorisation and applicable rules.

Credit period: Time allowed between invoice date and required payment date.

DSO: Days sales outstanding; an indicator of the average collection period for credit sales.

Due date: Date on which payment is contractually expected.

New reference: Bill-wise entry used to create a new invoice record.

On account: Receipt or payment recorded without allocation to a particular bill.

Outstanding balance: Amount remaining unpaid or uncollected after recorded settlements.

Part settlement: Payment or receipt that clears only part of an invoice.

Reconciliation: Comparison of two records to identify and resolve differences.

Write-off: Authorised removal of an amount that is determined to be uncollectible or no longer payable.

Review Questions

Short Answer Questions

1. What is the purpose of bill-wise accounting?
2. Distinguish a customer advance from a credit sale.
3. What is meant by an on-account receipt?
4. Why are due dates important in ageing reports?
5. State two controls that help prevent duplicate supplier payments.

Long Answer Questions

1. Explain the accounting and operational differences between accounts receivable and accounts payable.
2. Describe the procedure for recording a credit sale and subsequent part receipt using bill-wise details.
3. Explain how advances, credit notes and debit notes affect outstanding balances.
4. Discuss the preparation and interpretation of an ageing report.
5. Explain the internal controls required for reliable receivable and payable management.

Analytical / Application Questions

1. A customer has three unpaid invoices and makes one consolidated bank transfer without remittance advice. Explain how the receipt should be controlled, recorded and subsequently allocated.
2. A supplier statement shows a balance that is higher than the enterprise’s ledger balance. Develop a reconciliation procedure and identify at least four possible causes of the difference.
3. A customer is within its approved credit limit but has several invoices more than 90 days overdue. Should further credit automatically be granted? Analyse the decision using credit risk, disputes, payment history and management controls.

Multiple Choice Questions with Answers

Question 1

Which reference type is normally used when a new credit-sale invoice is entered?

A. New reference

B. Against reference

C. Advance

D. On account

Correct Answer: A. New reference

Question 2

A customer pays 15,000 against an invoice of 40,000. What balance remains on that invoice?

A. 15,000

B. 25,000

C. 40,000

D. 55,000

Correct Answer: B. 25,000

Question 3

A customer advance received before the related sale is generally treated initially as what?

A. Sales revenue

B. A customer-related liability or advance

C. A supplier payable

D. A bad debt expense

Correct Answer: B. A customer-related liability or advance

Question 4

Under terms of 2/10, net 30, what discount applies to an invoice of 50,000 if paid within 10 days?

A. 500

B. 1,000

C. 2,000

D. 5,000

Correct Answer: B. 1,000

Question 5

Which report classifies unpaid balances by time overdue?

A. Trial balance

B. Ageing report

C. Cash book

D. Inventory valuation report

Correct Answer: B. Ageing report

Question 6

What is the correct basic formula for days sales outstanding?

A. Net credit sales ÷ average receivables × days

B. Average receivables ÷ net credit sales × days

C. Cash collected ÷ purchases × days

D. Average payables ÷ inventory × days

Correct Answer: B. Average receivables ÷ net credit sales × days

Question 7

Which action best reduces the risk of duplicate supplier payments?

A. Removing supplier invoice numbers

B. Entering all payments on account

C. Matching supplier invoices with existing records and supporting documents

D. Changing invoice dates after payment

Correct Answer: C. Matching supplier invoices with existing records and supporting documents

Question 8

A receipt recorded without linking it to a particular invoice is best described as what?

A. Against reference

B. New reference

C. On account

D. Credit note

Correct Answer: C. On account

Question 9

Which item is normally included in a three-way check for purchases?

A. Purchase order, goods receipt and supplier invoice

B. Bank statement, payroll and sales order

C. Customer quotation, receipt and credit note

D. Trial balance, cash book and budget

Correct Answer: A. Purchase order, goods receipt and supplier invoice

Question 10

Why should AI-generated cash-application suggestions be reviewed by a responsible employee?

A. AI systems cannot display dates

B. Automated matching may be incorrect and requires governance

C. Review eliminates the need for source documents

D. AI can only be used for inventory transactions

Correct Answer: B. Automated matching may be incorrect and requires governance