Accounts Receivable – Explanation and Journal Entries
Accounts Receivable are the amount of money owed by the customers for goods or services purchased by them on credit. A receivable account can be created by someone who sells goods or services and extends a line of credit to its customers. They are also known as trade creditors or commonly abbreviated as “AR” & “O2C” (Order to Cash).
In layman terms, the total amount which is yet to be collected by debtors as per a firm’s sales book is termed as accounts receivables. Large firms using ERP packages replace traditional sales book with sales ledger control account.
The buyer can be a sole trader, a partnership firm or a full-fledged business. It is a short-term gain, hence an asset that is supposed to be received from the customers. Accounts receivables are shown on the asset side under the head current assets (right-hand side of a horizontal balance sheet).
Related Topic – What is Days Sales Outstanding (DSO)?
Let us assume that you sold goods worth 10,000 to one of your buyers who is supposed to pay you within 45 days of the day you bill him. Now, you send the customer an invoice for 10,000. In this case, the amount acts as dues to be received and will be booked in your records as accounts receivable.
It is similar to the situation where your mobile phone company generates an invoice on the 1st day of a month and gives you 30 days to pay the bill. It is an account receivable for the mobile phone company.
- Accounts receivable are created when you sell goods on credit.
- Accounts receivable should be collected from the customers within an agreed period of time.
- Accounts receivable are short-term gains, hence shown on the asset side under the head “current assets” of the balance sheet.
Journal Entries Related to Accounts Receivable
Below are the two main scenarios linked to accounts receivable cycle where, in the first case, credit sale is recorded and the customer is assumed to be billed, and, in the second case, cash proceeds from customers are recorded in the books of accounts.
At the time of recording a credit sale and billing the customer
|Accounts Receivable A/C||Debit|
|To Sales (on credit) A/C||Credit|
(This can also be recorded at a particular customer level subledger wise, in that case, the customer who is billed will be debited)
At the time of money received from customer
|Cash or Bank A/C||Debit|
|To Accounts Receivable A/C||Credit|
(This can also be recorded at a particular customer level subledger wise, in that case, the customer paying for the goods/services will be credited)
>Read Accounts Payable