Accounts Receivable Journal Entry

Introduction of Accounts Receivable Journal Entry

Account Receivable is an account created by a company to record the journal entry of credit sales of goods and services, for which the amount has not yet been received by the company. The journal entry is passed by making a debit entry in Account Receivable and corresponding credit entry in Sales Account.

Explanation

Whenever a company provides goods or services to a customer and if the customer is willing to pay the amount for services or goods in the future, the company provides a date to the costumer before which the costumer has to repay all the debts. The company handles such credit sales transactions by opening a new account called account receivables. Accounts Receivables are accounted in asset book of the seller, as the buyer owes him a sum of money against the goods and services already rendered by the seller. Alternatively, an account of Account Payables is created in a liability book of buyer for the money he owes.

Accounts Receivables are characterized as current asset in the Balance sheet as sales which are made on credit are expected to be paid soon according to the credit terms mentioned in the invoice which the seller has issued. Usually, when a company provides goods and services on credit, a large base of costumers gets attracted, due to which company is able to gather enough costumers for their business. However, it happens sometimes that the customer does not pay for the goods and services rendered which ultimately results in non-payment called bad debts. Hence, we can consider Accounts receivables as an investment that includes both risks and returns. Returns in the form of new customers and risk in the form of bad debt.

Examples of Account Receivable Journal Entry

Following are examples are:

1. ABC Inc sold some electronic items to Mr. John Stewart on Mar’01,2019. The total amount of invoice including expenses and Taxes was 25000$ which has to be paid on or before Apr’01, 2019.

In this case, recording in Journal entry will be as follows:

Date	Particulars	Debit	Credit
01-03-2019	Account Receivables A/c	25000
	To sales A/c		25000
Being Sold to Mr John Stewart on credit

25000$ will be debited from Account Receivables A/c as 25000/- has not yet been received by ABC Inc. Alternatively. 25000$ will be credited to Sales A/c as sales of 25000$ has been made.

2. Considering above example, Mr John Stewart made a full payment of 25000$ on Mar’20, 2019.

In this case, a new entry will be recorded as follows:

Date	Particulars	Debit	Credit
20-03-2019	Cash A/c	25000
	To Account Receivables A/c		25000
Being Full payment received by Mr John Stewart

Here, Full payment has been received by ABC Inc. Now, 25000$ received will be credited in Account Receivable A/c and hence Account Receivables will have now 0$ balance as both credit and debit payments are 25000$. While 25000$ will be debited form Cash A/c.

3. Considering example-1, Mr John Stewart made a payment of 12000$ on Mar’20, 2019.

In this case, a new entry will be recorded as follows:

Date	Particulars	Debit	Credit
01-03-2019	Account Receivables A/c	25000
	To sales A/c		25000
Being Sold to Mr John Stewart on credit

Date	Particulars	Debit	Credit
20-03-2019	Cash A/c	12000
	To Account Receivables A/c		12000
Being payment of 12000$ received from Mr John Stewart

Here, Payment of 12000$ has been received by ABC Inc. Now, 12000$ received will be credited in Account Receivable A/c and hence Account Receivables will now have 13000$ balance in debit. While 12000$ will be debited form Cash A/c.

Discount on Payments

ABC Inc sold some electronic items to Mr. John Stewart on Mar’01, 2019. The total amount of invoice including expenses and Taxes was 25000$. If total payment has been done before Mar’15, 2019, 5% discount will be given.

1. Mr John Stewart paid the full amount of 25000$ on Mar’12, 2019, and availed of the discount.

In this case, the journal entry will be as follows:

Transaction Entry

Date	Particulars	Debit	Credit
01-03-2019	Account Receivables A/c	25000
	To sales A/c		25000
Being Sold to Mr John Stewart on credit

Date	Particulars	Debit	Credit
12-03-2019	Cash A/c	23750
	Sales Discount A/c	1250
	To Account Receivables A/c		25000
Being Full payment of 23750$ received from Mr john stewart after allowing 5% discount

Here, the discount will be debited from Sales discount a/c, and a debit entry will be made for the remaining amount in Cash A/c. A credit entry will be made for the full amount in Account Receivables A/c.

Bad Debts – Direct Write-off way

ABC Inc sold some electronic items to Mr. John Stewart on Mar’01, 2019. The total amount of invoice including expenses and Taxes was 25000$ which has to be paid on or before Apr’01, 2019. Due to Family issues, John Stewart will not be able to make any payment

Date	Particulars	Debit	Credit
01-03-2019	Account Receivables A/c	25000
	To sales A/c		25000
Being Sold to Mr John Stewart on credit

Particulars	Debit	Credit
Bad debts expenses A/c	25000
To Account Receivables A/c		25000
Being writing-off Mr. John Stewart account and transferring balances to bad debts account

Here, as Mr. John Stewart is unable to pay the required amount, a journal entry will be made in Bad debts expenses and Account receivables account will be credited with write-off amount. Which concludes that the total write-off amount will be transferred to the Profit and Loss Account and will reduce the net profit.

Bad Debts – Allowance Method

ABC Inc sold some electronic items to Mr. John Stewart on Mar’01, 2019. The total amount of invoice including expenses and Taxes was 25000$ which has to be paid on or before Apr’01, 2019. Due to losses in business, John Stewart will not be able to make any payment.

In this case, a separate account of Doubtful costumers will be created to make an entry, which will not directly impact the P&L account.

Transaction Entry:

Date	Particulars	Debit	Credit
01-03-2019	Account Receivables A/c	25000
	To sales A/c		25000
Being Sold to Mr John Stewart on credit

Mr John Stewart may not be able to make full payment:

Particulars	Debit	Credit
Bad debts expenses A/c	25000
To allowance for doubtful A/c		25000
Being amount of doubtful debtors recorded

Mr John Stewart has paid the full payment.

Date	Particulars	Debit	Credit
01-05-2019	Allowance for doubtful A/c	25000
	To Account Receivables A/c		25000
Being Full Payment received from Mr. John Stewart

Conclusion

• Account Receivable is an account created by a company to record the journal entry of credit sales of goods and services, for which the amount has not yet been received by the company.
• Accounts Receivables are accounted in the asset book of the seller, as the buyer owes him a sum of money against the goods and services already rendered by the seller. Alternatively, an account of Account Payables is created in a liability book of buyer for the money he owes.
• We can consider Accounts receivables as an investment that includes both risks and returns. Returns in the form of new customers and risk in the form of bad debt.

Recommended Articles

This is a guide to Accounts Receivable Journal Entry. Here we also discuss the introduction and examples of account receivable journal entry along with a detailed explanation. You may also have a look at the following articles to learn more –

1. Accounts Receivable Process
2. Accounts Receivable Aging
3. Accounts Receivable Turnover Ratio
4. Accounts Payable Cycle