Accounts Receivable – Debit or Credit

Definition of Accounts Receivable – Debit or Credit

The following article provides an outline for Accounts Receivable – Debit or Credit. Account Receivable is the amount owed to the organization by a third party against goods sold by 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 for running a business, certain facilities have to be given to the customers so as to survive and achieve the sales targets. Generally, accounts receivable have the debit balance, but in some situation, the balance can become the credit also. When goods are given on credit to the customers or the service is rendered for which amount is not received, then the account of the customer is classified under accounts receivables in current assets.

If the customer has given the advance, then 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 is termed as accounts receivables, and if the amount is already received in advance, then it shows the credit balance. Debit balance indicates the asset, and credit balance indicates the liabilities as if the contract is not fulfilled or goods are not sent on time, then the amount received as advance can be repaid.

Recording Accounts Receivable

Accounts receivable are the liquid asset after the cash balance. When sales are made to the debtor, the accounts receivable will be debited with the sales account’s corresponding credit. The sales on the credit side are increased, and accounts receivables on the debit side also increased. Now, when cash is received from the debtors against such sales, then 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. buys the goods amounting to $ 20,000 on credit from XYZ Ltd on 17^th March 2020.

This amount of $20,000 is then received in 8^thApril from ABC ltd. Record journal entries of the above transactions in the books of XYZ Ltd

Journal Entries (FY 2019 – 2020)

ABC Ltd. is to be shown as debtors, and the amount due is to be shown as an asset under trade receivables under accounts receivables.

(FY 2020 – 2021)

Accounts Receivable in Debitor

In olden times, the accounts receivables and payables are to be recorded manually and hence lots of paper work was involved in it. 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, then 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

Customer Account is to be shown under the accounts receivables. Here the accounts receivable has the debit balance.

• When the cash is received from the customer with the full amount

• When the cash is received from the customer after giving the discount

• In case the advance is received from Customer for the contract of sales made.

The customer account is to be shown under the accounts receivables; here, the accounts receivable has 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. Now, in the trial, balance B Ltd will be shown as a debtor or accounts receivable having a balance of $ 5000.

But in the balance sheet, net accounts receivables will be shown 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 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.

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Conclusion – Accounts Receivable – Debit or Credit

Accounts receivable generally has a debit balance, but in some situations, the balance can be credit too. Like sales made to the customer on credit, then the amount receivable shows the debit balance on the asset side, but 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 amounts of account receivable are shown, and in the Balance sheet, the net amount of account receivables is shown.

Recommended Articles

This is a guide to Accounts Receivable – Debit or Credit. Here we also discuss the definition and recording accounts receivable along with an example and journal entries. You may also have a look at the following articles to learn more –

1. Accounts Payable Credit or Debit
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3. Accounts Receivable Journal Entry
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