Accounts Receivable Journal Entry

Account receivable is the amount which the company owes from the customer for selling its goods or services and the journal entry to record such credit sales of goods and services is passed by debiting the accounts receivable account with the corresponding credit to the Sales account.

Overview of Accounts Receivable Journal

Accounts receivables are the money owed to the company by the customers and accrual accounting system allows such type of credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more transactions by opening a new account called accounts receivable journal entry.

Accounts receivablesAccounts 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 can be considered as an investment made by the business that includes both risks and returns. Returns in the form of easily acquiring new customers and risk in the form of non-payments called bad debts.

Journal Entries for Accounting Receivable

E.g. The Indian Auto Parts (IAP) Ltd sold some truck parts to Mr. Unreal on credit. Since IAP has already incurred various expenses called the cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more (COGS) for the sales he has made but not been paid.

Now when Mr. Unreal Pays off his billing amount, the accounts-receivable account gets written off against payment received in cash. However, if payment is not received or is not expected to be received in the near future, then considering it to be losses, the seller can charge it as expenses against bad debts.

Let’s elaborate above example of Indian Auto Parts (IAP) Ltd and journalize the related transactions step by step:

  • On Jan 1, 2019, IAP ltd sold some truck parts to Mr. Unreal on credit. The calculated amount of invoice, including all expenses and taxes, was $10000 to be paid on or before Jan 31, 2019. Mr. Unreal made full payment of $10000 on Jan 28, 2019.
Account Receivable Journal Entry 1
Account Receivable Journal Entry 1-1
  • Recording credit sales if IAP provides credit terms to its customers. Consider credit terms as 2/10 net 30 i.e., if paid within 10 days, a discount of 2% is offered; otherwise, payment must be made within 30 days without any discount.
Receivable Sales Discount Entry 1-2

Mr. Unreal pays his billing amount on Jan 8, 2019, and avails the discount.

Accounting for Bad Debts

While making sales on credit, the company is well aware that not all of its debtors will pay in full, and the company has to encounter some losses called bad debts. Bad debts expenses can be recorded using two methods viz. 1.) Direct write-off method and 2.) Allowance method.

#1 – Direct Write-Off Method

Bad debts provisionBad Debts ProvisionA bad debt provision refers to the reserve made by a company to set aside an amount computed as a specific percentage of overall doubtful or bad debts that has to be written off in the next year.read more is recorded as a direct loss from defaulters, writing off their accounts and transferred in full amount to P&L account, thus lowers your net profit.

E.g. Mr. Unreal passed away and will not be able to make any payment.

Bad Debt Expense Entry 1-3

#2 – Allowance Method

Charge the reverse value of accounts receivables for doubtful customers to a contra account called allowance for doubtful account. This keeps the P&L account unaffected from bad debts, and reporting of the direct loss against revenues can be avoided. However, writing-off the account at a future date is possible. For example:-

a) Mr. Unreal incurred losses and is not able to make payment at due dates.

Doubtful allowance Entry 1-4

b) Mr. Unreal goes bankrupted and will not pay at all.

doubtful allowance journal entry1-5

c) Mr. Unreal has recovered from initial losses and wants to pay all of its previous debts.

Account Receivable Journal Entry 1-6
Cash Journal Entry 1-7

This has been a guide to Account Receivable Journal Entries. Here we discuss the overview of Accounts Receivables, journal entries examples, and we will also discuss the Effects of credit sales on inventory and its balance. You can learn more about firms from the following articles –