Some companies offer customers the option of purchasing products in exchange for a promise to pay. The company mails an invoice to the customer communicating the balance owed. The money owed by the customer represents an account receivable to the company. Companies offer a variety of payment options. These include mailing a payment, paying the invoice via the company website or paying over the phone. Once the customer initiates the payment, the accounts receivable system needs to process the payment before updating the customer balance.
Customers may purchase products or services from a company on a continual basis. When the company mails invoices to these customers, it displays both the current purchases and the total account balance. The account balance includes the total due from previous purchases and the current purchase. The accounts receivable system maintains the account balance for each customer, updating the total each time a payment is processed.
The company receives each payment after the customer initiates the payment. If the customer mails the payment, it may take several days before the company receives it. When the company receives the payment, it enters the information into the accounts receivable system. If the customer makes the payment online or by telephone, the company may receive it immediately or it may receive the payment the following day. For online and telephone payments, the payment automatically enters the accounts receivable system when the company receives it.
After the payment enters the accounts receivable system, the company runs a computer program to process the payment. Payment processing involves updating several company accounts. These include the cash account, the accounts receivable account and sales discounts. Sales discounts refer to reductions in the total invoice amount for customers who pay their bill early. The system increases the cash account by the amount of each payment received. The system increases the sales discounts account for the amount of discounts taken by customers. The system decreases the accounts receivable account by the total of the payment received and the sales discount.
Payment processing also updates the balance of each individual customer account. During processing mode, the computer system adjusts each customer account by the payment amount and the discount taken by that customer. Once the processing completes, the company knows the specific balance owed by each customer.
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