What Is the Journal Entry for Accounts Receivable?

Accounts receivable represents money owed to a business for goods or services already delivered to customers on credit. It is a current asset on the balance sheet, reflecting the short-term financial claims a company holds against its customers. Accrual accounting, which recognizes revenues when earned and expenses when incurred regardless of when cash changes hands, relies heavily on accounts receivable to portray a company’s financial position. Recording these transactions through journal entries is fundamental for accurate financial records.

Initial Recording of Sales on Credit

When a business sells goods or services on credit, it has earned revenue but has not yet received cash. This transaction creates an accounts receivable, signifying the customer’s promise to pay in the future. To record this, the business debits Accounts Receivable, increasing this asset account. Simultaneously, it credits Sales Revenue, recognizing the income earned from the sale.

For example, if a business sells $500 worth of products on credit, the journal entry would involve a debit of $500 to Accounts Receivable and a credit of $500 to Sales Revenue. The debit to Accounts Receivable reflects the increase in the amount customers owe the company. The corresponding credit to Sales Revenue acknowledges the increase in the company’s earned income. This entry ensures that revenue is recognized at the point of sale, aligning with accrual accounting principles, even though cash collection is deferred.

Recording Customer Payments

When customers pay their outstanding balances, this payment reduces the amount owed and increases the business’s cash. When a payment is received, the journal entry involves a debit to the Cash account.

Concurrently, the Accounts Receivable account is credited. For instance, if the customer from the previous example pays the $500 they owed, the business would debit Cash for $500 and credit Accounts Receivable for $500. This entry reflects the conversion of a promise to pay into actual cash, thereby clearing the specific customer’s outstanding balance.

Accounting for Uncollectible Debts

Not all accounts receivable are collected, resulting in uncollectible or bad debts. Two primary methods are used: the Direct Write-Off Method and the Allowance Method.

The Direct Write-Off Method records bad debt expense only when a specific account is deemed uncollectible, involving a debit to Bad Debt Expense and a credit to Accounts Receivable. For example, if a $100 customer account is uncollectible, the entry would be a $100 debit to Bad Debt Expense and a $100 credit to Accounts Receivable. While simple, this method is not compliant with Generally Accepted Accounting Principles (GAAP) because it violates the matching principle, which requires expenses to be recognized in the same period as the revenues they helped generate.

Conversely, the Allowance Method estimates uncollectible accounts in advance, aligning with GAAP’s matching principle. When a specific account is identified as uncollectible, the write-off journal entry involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. For instance, if the same $100 account is written off using the Allowance Method, the entry would be a $100 debit to Allowance for Doubtful Accounts and a $100 credit to Accounts Receivable. This method affects only balance sheet accounts at the time of write-off, as the expense was recognized earlier during the estimation process.