Recording Customer Payments

It is essential for Indian businesses to effectively manage customer payments under Accounts Payable (AP) and Accounts Receivable (AR). The primary goal is to monitor the debts owed by customers as well as those owed by the company to third parties. This impacts profitability, cash flow, and overall financial well-being. It is essential to understand the operation of AP and AR in the Indian business environment, where regulations such as GST and Ind AS are in effect, regardless of whether you are a modest enterprise or a large corporation.

Let’s break it down.

Accounts Receivable (AR)

The sum of money that a business is expecting from its clients is known as Accounts Receivable (AR). A company often provides consumers with an opportunity to pay for its products or services. Due to its representation of incoming cash, the balance sheet classifies AR, or amount owed, as an asset.

Main Points for AR in India:

• Issuing Invoices: The business sends out an invoice that specifies the price, payment terms, and applicable GST following a sale. To claim tax credits, the invoice must conform to GST, with the GST rate varying depending on the type of goods or services sold (18%, 12%, or 5%).
• GST-Compliant Invoicing: Indian laws mandate that invoices must contain essential information, including the GSTIN (Goods and Services Tax Identification Number), HSN (Harmonized System of Nomenclature) codes, and tax amounts. Incorrect invoicing can result in penalties and complicate tax claims.
• Payment Terms: Most Indian businesses typically grant customers 30 to 90 days to settle their accounts. It is beneficial to stay informed about these terms to make sure that cash flows smoothly.
• Recording Payments: When a customer makes a payment, the business records the payment in the books as well as updates the AR records accordingly. Receiving payments results in a decrease in the AR balance.
• Follow-up on Receivables: Delays in payments are common. Businesses should establish automated reminders or implement software to stop cash flow issues.

AR example,

• A company sells products worth ₹1,00,000.
• They issue an invoice with an additional ₹18,000 in GST (18%), so the customer owes ₹1,18,000.
• The sale is recorded as AR, and the due date is set.
• The AR ledger records the received payment and compares it with bank statements to ensure accuracy.

Accounts Payable (AP)

Accounts Payable (AP) is the flip side. The business owes suppliers or vendors money for goods and services it has received but not yet paid for. By effectively managing their accounts payable, businesses can avoid late fees, maintain good vendor relationships, as well as control their cash flow.

Main Points for AP in India:

• Vendor Invoices: Upon receipt of goods or services, the vendor issues an invoice to the business. The business verifies the accuracy of the price, quantity, and GST amount before recording the invoice under AP.
• GST Input Credit: The business has the option to claim an Input Tax Credit (ITC) on the GST it pays to vendors for AP. However, to obtain the ITC, the business need to maintain precise records of vendor GSTINs and match them with the data on the GST portal (via GSTR-2A or GSTR-2B).
• Payment Terms: With suppliers in India, payment terms typically range from 15 to 60 days. To avoid penalties and late fees, the organization need to carefully monitor these timelines.
• Recording Payments: After making a payment, AP records the transaction to maintain a clear paper trail that includes bank statements and payment vouchers.
• Vendor Reconciliation: Businesses should regularly verify their records with vendor accounts to prevent any disputes regarding missing payments or inaccurate amounts.

AP Example:

• ₹50,000 is the amount of money that a company purchases materials from a vendor.
• The vendor generates an invoice that includes ₹9,000 in GST, resulting in a total payable of ₹59,000.
• The AP system records the invoice and monitors the due date.
• Once the payment is made, the AP ledger is updated.
• In order to avoid disputes, the organization conducts routine reconciliations of vendor accounts.

Challenges in Recording Customer Payments

Indian businesses face numerous challenges in tracking and managing AR and AP.

• Delayed Payments: One major problem is that clients don’t pay on time very often. This can make it difficult for businesses, especially small ones, to get cash flow. The MSME Development Act requires payments within 45 days to protect small businesses. However, the enforcement of this law is not always strict.
• GST Reconciliation: It’s possible that you won’t be able to get your input tax credit if you don’t match up your GST returns and receipts correctly. This is why it’s important to keep your records up to date.
• Varying Payment Terms: Payment terms change a lot from industry to industry, and having to deal with different terms for each client and vendor can make it challenging to predict cash flow.
• Technological Limitations: Some small businesses don’t have access to automatic systems, so they have to do a lot of manual work. Keeping records by hand can lead to mistakes and make dealing with AR/AP more difficult.

Best Practices for Recording Customer Payments

Businesses can deal with these challenges by following a few best practices:

• Automation: You can manage billing, follow-ups, and reconciliation with accounting software. This speeds up the process and cuts down on mistakes made by people.
• Clear Payment Policies: Maintain transparency regarding payment terms with both your customers and suppliers. It guarantees prompt payment and avoids any misunderstandings.
• Reconciliation: Develop a routine for regularly reconciling both vendor and client accounts. This will help prevent disputes and make sure accurate monitoring of your cash flow.
• GST Compliance: Ensure all invoices, whether issued or received, comply with GST regulations. To avoid tax credit issues, consistently reconcile your GSTR-1 with GSTR-3B and match vendor data in GSTR-2A/2B.

Summary

Regardless of their classification as Accounts Receivable or Accounts Payable, businesses in India must document consumer payments to ensure smooth operations. Businesses can maintain GST compliance and avoid cash flow problems by paying close attention to invoicing, payments, and reconciliations. Financial operations maintain optimal efficiency and minimize errors by automating processes and adhering to industry standards.

Questions to Test Your Understanding

Q1.) What is the primary goal of managing Accounts Payable (AP) and Accounts Receivable (AR)?

1. To increase sales
2. To track company profitability only
3. To monitor debts owed by customers and debts the company owes
4. To keep track of inventory levels

Q2.) Which Indian law requires invoices to include essential details like GSTIN and HSN codes?

1. MSME Act
2. Income Tax Act
3. Companies Act
4. GST Law

Q3.) What is the typical range of payment terms granted by Indian businesses to their customers?

1. 7 to 15 days
2. 30 to 90 days
3. 15 to 30 days
4. 60 to 120 days

Q4.) What major challenge do businesses face in managing AR and AP?

1. Increasing sales
2. Delayed payments from customers
3. Extending the customer base
4. Low employee productivity

Q5.) What happens when a customer makes a payment towards Accounts Receivable (AR)?

1. The AR balance increases
2. The AR balance decreases
3. The Accounts Payable (AP) balance increases
4. The company’s liabilities increase