Accounts Receivable – Debit or Credit?

Is Accounts Receivable Debit or Credit?

Account receivables 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, debit 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.

Treatment of Account Receivables as Debits or Credits Under IFRS

From 1^st 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:

If an invoice is raised, the above account receivables will be disclosed as Trade receivables under current assets. However, if it is not invoiced, then the same will be disclosed as “Unearned Assets “along with invoiced trade receivables.

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 entry will be passed:

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:

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 flow 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 sheet.

Accounts Receivables in case of Advance Payment

In a specific business, there is always need that customer has to make the advance payment 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 liability.

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.

Recommendation Article

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 –

• Top Examples of Accounts Receivable
• Accounts Receivable Financing Overview
• Accounts Receivables Turnover Ratio Calculation