Is Accounts Receivable a Debit or a Credit?
Unpack the core accounting principles governing Accounts Receivable. Learn its classification as a debit or credit and how to manage its entries.
Accounts receivable represents money owed to a business by customers for goods or services already delivered but not yet paid. These amounts are typically collected within 30 to 60 days. Tracking accounts receivable requires understanding the fundamental accounting concepts of debits and credits, which form the basis of financial recording.
Understanding Debits and Credits
Debits and credits are the foundational elements of the double-entry accounting system, used to record every financial transaction. These terms indicate the direction of a transaction’s impact on an account, rather than simply meaning “increase” or “decrease.” Debits are recorded on the left side of an account, while credits are recorded on the right side. For every transaction, the total value of debits must always equal the total value of credits, ensuring the accounting equation remains balanced.
The effect of a debit or credit depends on the type of account involved. Debits increase asset and expense accounts, while decreasing liability, equity, and revenue accounts. Conversely, credits increase liability, equity, and revenue accounts, and decrease asset and expense accounts. This consistent application across all accounts ensures that financial records accurately reflect a business’s economic activities.
Accounts Receivable as an Asset
Accounts receivable is money customers owe a company for products or services provided on credit. Since these amounts represent a future economic benefit—a claim to cash that the company expects to collect—accounts receivable is classified as an asset on a company’s balance sheet.
Accounts receivable is considered a current asset because these amounts are expected to be converted into cash within one year or the normal operating cycle. This classification highlights its role in a company’s short-term financial health and liquidity. The ability to convert accounts receivable into cash helps manage daily operations and meet financial obligations.
The Normal Balance of Accounts Receivable
Accounts receivable has a normal debit balance. The “normal balance” of an account refers to the side (debit or credit) where increases to that account are recorded. Since accounts receivable is an asset account, and asset accounts increase with debits, its normal balance is a debit.
This means that when the amount of money owed to the business by customers increases, a debit entry is made to the accounts receivable account. Conversely, a credit entry to accounts receivable would indicate a decrease in the amount owed. This principle is consistent with how all asset accounts are treated within the double-entry bookkeeping system.
Recording Transactions for Accounts Receivable
When a business makes a sale on credit, accounts receivable increases. This transaction is recorded by debiting the Accounts Receivable account to reflect the increase in the amount owed, and crediting the Sales Revenue account.
When a customer makes a payment, the amount owed to the business decreases. This receipt of cash is recorded by debiting the Cash account, as cash is an asset increasing with a debit. Simultaneously, the Accounts Receivable account is credited, which reduces its balance, signifying that the customer’s obligation has been settled. Managing these entries helps with accurate cash flow projections and maintaining financial records.