Final answer:
In the balance forward method of tracking accounts receivable, customers pay according to the amount showing on their monthly statement and payments are applied against the total account balance.
Step-by-step explanation:
The balance forward method is a common approach used by businesses to manage and track accounts receivable.
Here's how it works:
1. Monthly statements: With the balance forward method, businesses generate monthly statements for each customer. These statements include details of the customer's transactions, such as purchases, payments, and any other adjustments made to their account during the month.
2. Amount due: The monthly statement shows the total amount due from the customer at the end of the billing period. This includes the outstanding balance from previous periods plus any new charges or adjustments made during the current month.
3. Customer payment: When the customer receives the monthly statement, they make a payment based on the amount shown as due on the statement. This payment can be made in full or partially, depending on the customer's preference or financial situation.
4. Application of payment: Once the payment is received, it is applied against the total account balance. In the balance forward method, payments are typically applied to the oldest outstanding charges first, gradually reducing the overall account balance.
5. Updated statement: After the payment is applied, the business generates a new monthly statement for the next billing period. This statement reflects the remaining balance, if any, after the payment has been deducted.