Updated July 15, 2023
Definition of Accounts Receivable – Debit or Credit
Account Receivable is the amount owed to the organization by a third party against goods sold by the organization or loan or advance given etc. where they are legally enforceable claims as the company has right for receiving the amount being goods or the service under consideration is already delivered to the customer, and these account receivables are shown as assets in the balance sheet of the company which generally have the debit balance.
Explanation
A business cannot operate in isolation, so to run a business, certain facilities must provide to the customers to survive and achieve sales targets. Generally, accounts receivable have a debit balance, but in some situations, the balance can also become credit. When goods are given on credit to the customers or the service is rendered for which the amount is not received. The account of the customer is classified under accounts receivables in current assets.
If the customer has given the advance, the customer ledger amount shows the credit balance. Similarly, for other transactions, like if the organization or asset gives the loan is sold, or for other business transactions, any amount receivable term as accounts receivables. If the amount already receives in advance, it shows the credit balance. Debit balance indicates the asset, and credit balance indicates the liabilities. If the contract is not fulfilled or goods are not sent on time, the amount received as advance can pay.
Recording Accounts Receivable
Accounts receivable are the liquid asset after the cash balance. When sales are made to the debtor, the accounts receivable will debit with the sales account’s corresponding credit. The sales on the credit side increased, and accounts receivables on the debit side also increased. When cash is received from the debtors against such sales, the cash account is debited with the corresponding credit to the account receivable. The cash is increased on the debit side, and the receivables are decreased on the debit side.
Example of Accounts Receivable – Debit or Credit
ABC Ltd. bought the goods amounting to $ 20,000 on credit from XYZ Ltd on 17th March 2020.
This amount of $20,000 was then received on 8th April from ABC Ltd. Record journal entries of the above transactions in the books of XYZ Ltd.
Journal Entries (FY 2019 – 2020)
| Date | Particulars | Debit ($) | Credit($) |
| 8th April 2020 | Cash or Bank A/c | 20,000 | |
| To ABC Ltd. A/c | 20,000 | ||
| (Being Amount Received from Debtor ABC Ltd.) |
ABC Ltd. is to be shown as debtors, and the amount due will be shown as an asset under trade receivables under accounts receivables.
(FY 2020 – 2021)
| Date | Particulars | Debit ($) | Credit($) |
| 8th April 2020 | Cash or Bank A/c | 20,000 | |
| To ABC Ltd. A/c | 20,000 | ||
| (Being Amount Received from Debtor ABC Ltd.) |
Accounts Receivable in Debitor
In olden times, the accounts receivables and payables were to be recorded manually; hence, lots of paperwork was involved. With the advancement of technology, all the transactions are to be recorded in the automated system, and this recording of transactions that are automatically processed in the system is called a concept of the debtor. For example, credit sales are recorded where the credit period is 15 days. If the amount is not received on the expiry of 15 days, the system will automatically show that the credit period is expired. The amount is yet to be received, and if the amount is received, then the cash will increase, and debtors will decrease. Due to automation, the particular debtor’s account balance will automatically get nullified with the amount received.
Journal Entries for Accounts Receivable
- Goods Sold on Credit to the Customer
|
Date |
Particulars | Debit ($) |
Credit($) |
| Customer A/ | XXX | ||
| To sales A/c | XXX | ||
| (being credit sales made to Debtor amounting xxx ) | |||
Customer Account is to be shown under the accounts receivables. Here the accounts receivable have the debit balance.
- When the cash is received from the customer with the full amount
|
Date |
Particulars | Debit ($) |
Credit($) |
| Cash or Bank A/c | XXX | ||
| To Customer A/c | XXX | ||
| (being amount received from Debtor against credit sales amounting to XXX ) | |||
- When the cash is received from the customer after giving the discount
|
Date |
Particulars | Debit ($) |
Credit($) |
| Cash or Bank A/c | XXX | ||
| Sales Discount A/c | |||
| To Customer A/c | XXX | ||
| (being the amount received from the Debtor against credit sales amounting to XXX after giving the discount of XXX) | |||
- In case the advance is received from the Customer for the contract of sales made.
|
Date |
Particulars | Debit ($) |
Credit($) |
| Cash or Bank A/c | XXX | ||
| To Customer A/c | XXX | ||
| (being Advance received from Debtor (party name) amounting to XXX ) | |||
The customer account is to be shown under the accounts receivables; here, the accounts receivable have a credit balance.
Accounts Receivable in Trial Balance and Balance Sheet
In Trial Balance, accounts receivables are shown with the actual amount receivable from the third party. For example, A Ltd sold goods to B Ltd. amounting to $ 5,000. In the trial, balance B Ltd will be shown as a debtor or accounts receivable with a balance of $ 5000.
But the balance sheet shows net accounts receivables after adjusting cash discounts, bad debts, etc. Like in the above example, if the amount received is $ 4,000 and $ 1,000 cannot be receivable due to the bankruptcy of Mr. B., then in the Balance sheet, $ 4,000 will be shown as debtors, and $ 1,000 will be shown in the profit and loss account as $ 1,000.
Conclusion – Accounts Receivable – Debit or Credit
Accounts receivable generally have a debit balance, but the balance can be credited in some situations. For sales made to the customer on credit, the amount receivable shows the debit balance on the asset side. Still, if the advance is received, the amount received is shown as a credit balance in accounts receivables. The automated system through which the transactions are recorded is called a debtor. In Trial Balance, gross accounts receivable amounts are shown, and the Balance sheet shows the net amount of accounts receivables.
Recommended Articles
This is a guide to Accounts Receivable – Debit or Credit. Here we also discuss the definition and recording of accounts receivable, an example, and journal entries. You may also have a look at the following articles to learn more –
