Is Accounts Receivable a Debit or Credit?

Accounts receivable represents money owed to a company by its customers for goods or services delivered but not yet paid for. This financial asset is common when transactions occur on credit. This article clarifies the accounting treatment of accounts receivable within a business’s financial records.

Understanding Accounts Receivable

Accounts receivable arises when a business extends credit to its customers, allowing them to receive products or services immediately and pay at a later date. For example, a consulting firm might complete a project for a client, issuing an invoice with payment due in 30 days. During this 30-day period, the outstanding amount is classified as accounts receivable.

Accounts receivable is categorized as a current asset on a company’s balance sheet. An asset represents something of value that a business owns and expects to provide a future economic benefit. The future economic benefit is the cash collected from customers. The classification as a current asset indicates that these amounts are expected to be converted into cash within one year or the normal operating cycle of the business.

The Role of Debits and Credits

Modern accounting uses the double-entry bookkeeping system, where every financial transaction affects at least two accounts. This system maintains the accounting equation, where assets equal the sum of liabilities and equity. Debits and credits are the two fundamental entries used to record financial transactions.

Debits record increases in asset and expense accounts, while they record decreases in liability, equity, and revenue accounts. Conversely, credits record increases in liability, equity, and revenue accounts, and decreases in asset and expense accounts. Since accounts receivable is an asset account, an increase in the amount owed to the company is recorded as a debit. Conversely, when the amount owed to the company decreases, such as when a customer pays their invoice, a credit entry is made to the accounts receivable account. Therefore, accounts receivable is increased by a debit and decreased by a credit, consistent with the rules for all asset accounts.

Common Accounts Receivable Transactions

Accounts receivable balances fluctuate with the daily operations of a business, reflecting new credit sales and customer payments. When a business sells goods or services on credit, the accounts receivable account is debited, and a revenue account, such as sales revenue, is credited. This transaction establishes the customer’s obligation to pay and recognizes the income earned. For instance, if a business sells $500 worth of products on credit, accounts receivable increases by $500.

The most common transaction reducing accounts receivable is the collection of cash from customers. When a customer pays an invoice, the cash account is debited to reflect the increase in cash. Concurrently, the accounts receivable account is credited to decrease the outstanding balance. This converts the accounts receivable asset into a cash asset.

Occasionally, a business may determine certain accounts receivable will not be collected, often due to customer bankruptcy or inability to pay. In such cases, the uncollectible amount is written off by crediting the accounts receivable account. A corresponding debit is made to an allowance for doubtful accounts or bad debt expense, reflecting the loss incurred. These write-offs ensure that accounts receivable on the balance sheet accurately reflects amounts expected to be collected.

Accounts Receivable on Financial Statements

Accounts receivable is displayed on a company’s balance sheet, providing a snapshot of its financial position at a specific point in time. It is listed under current assets, typically after cash and marketable securities. The reported balance represents the total amount customers owe for credit sales as of the balance sheet date.

This figure is net of any allowance for doubtful accounts, representing the amount the company expects to collect. The presence and size of accounts receivable offer insights into a company’s sales activity and its credit policies. It serves as an indicator of a company’s liquidity, as these amounts are expected to convert into cash in the near future, providing funds for ongoing operations.