How to Record Accounts Receivable Journal Entries

Accounts Receivable (AR) represents the money owed to a business for goods or services that have been delivered to customers on credit but not yet paid for. This balance is categorized as a current asset on a company’s balance sheet, indicating funds the business expects to receive within a year. Accurate recording of these entries is fundamental for understanding a company’s financial health, managing cash flow, and assessing its liquidity.

Understanding When to Record

An Accounts Receivable journal entry is primarily triggered by a sale made on credit. A credit sale means a business provides goods or services now, with payment due later.

To prepare for recording such a transaction, essential information is gathered from a sales invoice, which serves as the source document. The sales invoice typically includes the date of the sale, the customer’s name, a detailed description of the goods or services provided, the total amount of the sale, and the agreed-upon payment terms. Common payment terms can range from “Due upon receipt” to “Net 30,” “Net 60,” or even “Net 90” days, meaning payment is due within 30, 60, or 90 days from the invoice date, respectively. Some invoices might also offer discounts for early payment, such as “2/10 Net 30,” which allows a 2% discount if paid within 10 days, with the full amount due in 30 days.

Recording the Initial Sale on Credit

Recording transactions in accounting follows the double-entry bookkeeping principle, which dictates that every financial transaction affects at least two accounts. For every debit entry, there must be a corresponding credit entry of an equal amount to maintain balance in the accounting equation. Debits are typically recorded on the left side of an account ledger, while credits are recorded on the right side. For asset accounts, such as Accounts Receivable, a debit increases the balance, while a credit decreases it. Conversely, for revenue accounts, a credit increases the balance, and a debit decreases it.

When recording an initial sale on credit, the standard journal entry reflects the increase in both the asset (Accounts Receivable) and the revenue (Sales Revenue). For instance, if a business sells $500 worth of services on credit to a customer, the entry would involve debiting Accounts Receivable for $500. Simultaneously, Sales Revenue would be credited for $500, increasing the revenue account to recognize the income earned from the service provided. This entry formally recognizes the revenue at the time of sale, even though cash has not yet been received.

Handling Subsequent Accounts Receivable Transactions

After the initial credit sale, several other common transactions can affect the Accounts Receivable balance. One frequent occurrence is the receipt of cash from customers. When a customer pays an outstanding invoice, the business records this by debiting the Cash account, which increases the cash asset. Concurrently, the Accounts Receivable account is credited, decreasing the amount owed by the customer as the debt is settled. For example, if the $500 invoice mentioned earlier is paid, the entry would be a debit to Cash for $500 and a credit to Accounts Receivable for $500.

Businesses also encounter sales returns and allowances. A sales return happens when a customer sends back goods, while an allowance is a reduction in price for goods kept by the customer, often due to minor defects. When a customer returns goods or is granted an allowance, the business debits a contra-revenue account called Sales Returns and Allowances. This account reduces the overall sales revenue.

The corresponding credit is made to Accounts Receivable, which decreases the amount the customer owes. If a customer returns $100 worth of goods from their $500 invoice, the entry would be a debit to Sales Returns and Allowances for $100 and a credit to Accounts Receivable for $100.

Finally, some accounts receivable may become uncollectible, known as bad debts. When it is determined that a specific customer’s account will not be paid, a write-off occurs. Using the direct write-off method, the uncollectible amount is recognized as an expense when deemed uncollectible. The journal entry involves debiting Bad Debt Expense and crediting Accounts Receivable. For instance, if a $50 invoice is deemed uncollectible, the entry would be a debit to Bad Debt Expense for $50 and a credit to Accounts Receivable for $50.