Is Account Receivable a Debit or Credit? A Full Explanation

Accounts Receivable (AR) represents money owed to a business by its customers for goods or services that have been delivered but not yet paid for. It is a result of using the accrual method of accounting, which records revenue when earned, not necessarily when cash is received. Accounts Receivable is classified as an asset on the balance sheet and typically carries a debit balance.

Understanding Debits and Credits

Double-entry bookkeeping is the fundamental accounting method where every financial transaction impacts at least two accounts. This system uses debits and credits to balance the accounting equation (Assets = Liabilities + Equity). A debit is an entry on the left side of an account ledger, while a credit is an entry on the right side.

The effect of a debit or credit depends on the type of account. Accounts are categorized into Assets, Liabilities, Equity, Revenue, and Expenses. Assets and Expenses increase with debits and decrease with credits, while Liabilities, Equity, and Revenue accounts increase with credits and decrease with debits.

Accounts Receivable as an Asset Account

Accounts Receivable represents a future economic benefit, specifically the right to receive cash from customers for sales already made. This classification places Accounts Receivable within the “Assets” component of the accounting equation.

As an asset, Accounts Receivable increases when debited and decreases when credited. Businesses closely monitor their Accounts Receivable balances as they represent credit extended to customers. Under U.S. Generally Accepted Accounting Principles (GAAP), Accounts Receivable must be reported at its net realizable value, which is the amount of cash a business expects to collect. This means the balance presented on financial statements will account for potential uncollectible amounts, such as bad debt.

Applying Debits and Credits to Accounts Receivable

When a business sells goods or services on credit, it establishes a claim for future payment from the customer. To record this transaction, Accounts Receivable is debited, which increases the asset account. Simultaneously, Sales Revenue is credited, increasing the revenue account because the income has been earned, even if cash has not yet been received. For example, if a business sells $500 worth of services on credit, the journal entry would involve a debit of $500 to Accounts Receivable and a credit of $500 to Sales Revenue.

When a customer pays their outstanding balance, the business receives cash, and its right to collect that specific amount is fulfilled. In this scenario, Accounts Receivable is credited, which decreases the asset account. Concurrently, the Cash account, also an asset, is debited to reflect the increase in cash. For instance, if the customer from the previous example pays the $500 owed, the entry would be a debit of $500 to Cash and a credit of $500 to Accounts Receivable.

A debit entry will increase the balance of Accounts Receivable, indicating more money is owed to the business. A credit entry, on the other hand, will decrease the balance, reflecting that a customer has paid their outstanding amount or that an amount has been deemed uncollectible.