Is Accounts Receivable a Debit or a Credit?

Accounting serves as the language of business, providing a structured way to record, organize, and report financial activities. The foundation of this system relies on a principle known as double-entry accounting, where every financial transaction has at least two effects. These effects are captured using debits and credits.

Understanding Debits and Credits

Debits and credits are fundamental concepts in accounting, representing the two sides of every financial transaction. A debit entry is always recorded on the left side of an account, while a credit entry is always recorded on the right side. These terms do not inherently mean “increase” or “decrease”; their effect depends entirely on the type of account involved.

For asset and expense accounts, a debit increases the balance, and a credit decreases it. Conversely, for liability, equity, and revenue accounts, a credit increases the balance, and a debit decreases it. The double-entry accounting system mandates that for every transaction, the total debits must always equal the total credits, ensuring the accounting equation remains balanced.

Accounts Receivable as an Asset

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. This occurs when a business extends credit, allowing customers to pay at a later date. AR is classified as a current asset on a company’s balance sheet.

Accounts Receivable is considered an asset because it signifies a future economic benefit to the company—it is a claim to cash that the business expects to receive. As an asset account, Accounts Receivable follows the rule that an increase in its balance is recorded with a debit, and a decrease is recorded with a credit. Businesses expect to collect these amounts within one year.

Recording Accounts Receivable Transactions

Recording Accounts Receivable transactions involves specific journal entries that reflect the movement of funds. When a business makes a sale on credit, it has delivered goods or services but has not yet received payment. To account for this, the Accounts Receivable account is debited, increasing the amount owed to the business. Simultaneously, a revenue account, such as Sales Revenue, is credited to recognize the income earned from the sale, impacting the accounting equation by increasing both assets (Accounts Receivable) and equity (through revenue).

When a customer pays their outstanding balance, the business receives cash, which is also an asset. In this scenario, the Cash account is debited to reflect the increase in cash. Correspondingly, the Accounts Receivable account is credited, decreasing the amount the customer owes since the debt has been settled. This transaction shifts value within the asset category; cash increases while accounts receivable decreases by the same amount. Businesses establish payment terms, such as “Net 30,” indicating that the payment is due within 30 days of the invoice date.