How to Record Accounts Receivable Journal Entries

Accounts receivable (AR) represents the money owed to a business by its customers for goods or services that have been delivered but not yet paid for. This financial asset is a component of a company’s balance sheet, recognized as a current asset because these amounts are typically collected within a short period (less than a year). Accounts receivable impacts a business’s cash flow and overall liquidity. Managing these receivables efficiently helps ensure a stable influx of cash, allowing the business to cover operational costs, invest in growth, and maintain financial stability.

Identifying Accounts Receivable Transactions

Accounts receivable primarily originates from sales made on credit, where a customer receives goods or services without immediate payment. This extension of credit means the business has a legally enforceable claim for payment. Businesses commonly use specific source documents to initiate and track these transactions, such as sales invoices, sales orders, or service agreements. These documents provide the foundational information required to accurately record the receivable.

A sales invoice is a detailed record that typically includes the customer’s name, invoice number, sale date, total amount due, and a description of goods or services. It also specifies payment terms, outlining when and how the customer is expected to pay. Common terms include “Net 30” (full amount due within 30 days) or “2/10 Net 30” (2% discount if paid within 10 days, full amount due in 30 days). Identifying these details from source documents is a necessary first step before any accounting entries.

Recording Initial Credit Sales

Recording an initial credit sale involves applying the double-entry accounting principle, ensuring that every transaction affects at least two accounts. For a credit sale, the Accounts Receivable account is debited, and the Sales Revenue account is credited. Debiting Accounts Receivable increases this asset account, reflecting the money now owed to the business. Simultaneously, crediting Sales Revenue recognizes the income earned from the sale, even though cash has not yet been received.

For example, if a business sells goods on credit for $500, the journal entry involves a debit of $500 to Accounts Receivable and a credit of $500 to Sales Revenue. This entry is first recorded in a journal, a chronological record of transactions. It is then posted to the general ledger, which summarizes all accounts. The specific transaction detail is also posted to the individual customer’s account within the accounts receivable subsidiary ledger, providing a detailed record of what each customer owes.

Recording Customer Payments

When a customer pays an outstanding accounts receivable balance, the business’s Accounts Receivable balance is reduced. The payment transaction also follows the double-entry accounting principle. In this instance, the Cash account (or Bank account) is debited, and the Accounts Receivable account is credited. Debiting the Cash account increases the business’s cash assets, reflecting the money received. Crediting Accounts Receivable decreases this asset, as the customer’s obligation has now been fulfilled.

For example, if the customer from the previous example pays the $500 owed, the journal entry is a debit of $500 to Cash and a credit of $500 to Accounts Receivable. It is posted to the general ledger, where the cash account balance increases and the accounts receivable control account balance decreases. The individual customer’s account in the accounts receivable subsidiary ledger is also updated to reflect the payment, removing the specific invoice from their outstanding balance and showing a zero balance for that transaction.

Maintaining Accounts Receivable Records

Maintaining accurate accounts receivable records is an ongoing process that helps a business track and manage customer balances effectively. A key tool for this is the accounts receivable subsidiary ledger, which contains detailed information for each customer’s transactions, including sales, payments, and outstanding invoices. This detailed ledger provides specific customer-level insights that are not available in the general ledger, which only shows a summarized total of all receivables. The sum of all individual customer balances in the subsidiary ledger should periodically reconcile with the total balance in the Accounts Receivable control account in the general ledger.

Reconciliation involves comparing the detailed records in the subsidiary ledger with the summary balance in the general ledger to ensure accuracy and identify any discrepancies. This process is often performed monthly as part of closing activities. Another important tool for managing receivables is the aging report, which categorizes outstanding invoices by how long they have been due, typically in intervals like 0-30 days, 31-60 days, and so forth. This report helps businesses monitor the timeliness of payments and identify accounts that may require follow-up. Additionally, customer statements are generated to remind customers of their outstanding balances and provide a summary of their account activity, fostering clear communication and encouraging timely payment.