Accounts Receivable – Debit or Credit?

Is Accounts Receivable Debit or Credit?

Account receivablesAccount ReceivablesAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.read more are the cash inflows that creditor is going to receive based on the credit period given to the customers as per the prevailing market trend. As per the golden rules of accounting, debitDebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more means assets, and credit means liabilities. Account Receivables represent transaction exposure in the form of cash inflow in the near future. Directly or indirectly, the same show that an entity will get benefit from this exposure. Hence, the answer to the question of whether Accounts Receivables Debit or Credit is very simple. One can conclude that Account receivable should be debited and should be visible on the asset side.

Accounts Receivable - Debit or Credit

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Treatment of Account Receivables as Debits or Credits Under IFRS

From 1st January 2018, in IFRS 15, detailed guidelines have been given to recognized account receivables and when the same is needed to be debited or credited.

As per standard, account receivable – credit or debit can be recognized as revenue on the satisfaction on any of the following particulars:

  • The customer receives and consumes the benefit provided by the entity as the entity performs at the same time;
  • The entity’s performance gives betterment to an asset that the customer controls as the asset is getting developed/supplied; or
  • Entity creates such a product/provides such service that has no alternative use, and the entity has an enforceable right to receive consideration for the completed performance.

If any of the above condition is met, the following entry is to be passed:

Entry for Account Receivables 1

If an invoice is raised, the above account receivables will be disclosed as Trade receivablesTrade ReceivablesTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more under current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more. However, if it is not invoiced, then the same will be disclosed as “Unearned Assets “along with invoiced trade receivables.

Entry for Unearned Assets 2

In case of advance receipt from the customers, the standard gives guidance to follow one step ahead then the routine accounting treatment. Standard describes that if there exists a significant time gap of more than one year between the advance receipt and the transfer of goods/provision of service, then there exists the loan component in that advance receipt. Otherwise, they will be directly recorded as the liability by crediting the same.

Thus, if an advance is received by a creditor and the time gap is less than one year, the following accounting entryAccounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. read more will be passed:

Entry For bank 3

However, if the time gap is beyond one year, the entity will have to identify the interest component and following account entry will be passed:

Entry for bank acc 4

Account receivables post raising of invoices.

Generally, in business, the first products/ services will be supplied to the customer. On the completion of the commitment, the invoice will be issued, and accordingly, cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more will take place. In this process, if the customer makes payment based on the issue of the invoice, then the figure for trade receivables will always be positive. It shows that an entity is entitled to receive a specified amount on the completion of the specified period.

Thus, whenever, Account receivable figures are accounted for post-completion of obligations, it will be on the debit side and should be parked under the asset side of the balance sheetAsset Side Of The Balance SheetAssets in accounting refer to the organization's resources that hold specific economic value and facilitate business operations, meet expenses, and generate cash flow. They create the company's worth and are recorded in the balance sheet.read more.

Accounts Receivables in case of Advance Payment

In a specific business, there is always need that customer has to make the advance paymentAdvance PaymentAdvance payment is made by a buyer to the seller before the actual scheduled time of receiving the goods and services. It protects the seller from the risk of non-payment. Additionally, it helps sellers financially in the production of the goods or rendering of services.read more to initiate the supply of product or provision of services. For example, the telecom industry in which customers are purchasing prepaid cards. In such a scenario, invoices will not be raised at the time of receipt of payment.

  • The first payment will be received, then products/services will be supplied, and then at the end, invoices will be issued.
  • In this case, Account receivable figures will show a negative figure as this will directly obligate the entity to provide the committed obligations in a fixed portion of time and under specified terms and conditions.
  • Such advance payment will be credited as this will be linked with the services/obligations with creditors.

Thus, from the above discussion, it can be clear that Account receivables post raising of invoices will be debited to Sales Revenue, and hence will be visible under Asset Side, under current assets. However, if an amount has been received as an advance before the completion of a performance obligation, then such Account receivable will be considered as a liability. It will be credited to the bank account, and disclosed under the liability side, under current liabilityCurrent LiabilityCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more.

Conclusion

In the modern scenario, account receivable holds one of the most important positions as it is an essential component of current assets. In the past, major scams have been taken place by manipulating the accounts receivables, and thus, it is very crucial to ensure the correct disclosure of the same. From the above discussion, it can be clearly understood, that account receivable, generally will be debited if it is to be considered post-issuance of the invoice. However, if it is in relation to the advance receipt from the customer, then it is needed to be credited. Professionals will be needed to use their judgment to identify whether any significant financing portion exists or not in recording unearned liability.

This article has been a guide to Accounts Receivable – Debit or Credit. Here we discuss IFRS treatment of accounts receivables along with examples & explanations. You may learn more about accounting from the following articles –

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