Updated July 18, 2023
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 company has not yet received the amount. The journal entry is passed by making a debit entry in Account Receivable and a 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 customer before which the customer 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 for 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 the buyer for the money he owes.
Accounts Receivables are characterized as current assets in the Balance sheet as sales that 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 customers gets attracted, due to which the company is able to gather enough customers for their business. However, it sometimes happens 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$ have been made.
2. Considering the 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 to Account Receivable A/c, and hence Account Receivables will now have 0$ balance as both credit and debit payments are 25000$. At the same time, 25000$ will be debited from 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, a Payment of 12000$ has been received by ABC Inc. Now, 12000$ received will be credited to Account Receivable A/c, and hence Account Receivables will now have 13000$ balance in debit. While 12000$ will be debited from Cash A/c.
Discount on Payments
ABC Inc sold some electronic items to Mr. John Stewart on Mar’01, 2019. The total amount of the invoice, including expenses and Taxes, was 25000$. If the total payment has been done before Mar’15, 2019, a 5% discount will be given.
1. Mr. John Stewart paid the full amount of 25000$ 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 a 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 invoices, including expenses and Taxes, was 25000$, which has to be paid on or before Apr’01, 2019. Due to Family issues, John Stewart will not be able to make any payment
| Date | Particulars | Debit | Credit |
| 01-03-2019 | Account Receivables A/c | 25000 | |
| To sales A/c | 25000 | ||
| Being Sold to Mr. John Stewart on credit | |||
| Particulars | Debit | Credit |
| Bad debts expenses A/c | 25000 | |
| To Account Receivables A/c | 25000 | |
| Being writing-off Mr. John Stewart’s account and transferring balances to bad debts account | ||
Here, as Mr. John Stewart is unable to pay the required amount, a journal entry will be made in Bad debts expenses, and the Account receivables account will be credited with the write-off amount.
Bad Debts – Allowance Method
ABC Inc sold some electronic items to Mr. John Stewart on Mar’01, 2019. The total amount of the invoice, including expenses and Taxes, was 25000$, 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 payments.
In this case, a separate account for Doubtful customers 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 | |
| The number 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
Accounts Receivables are accounted for 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 the 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.
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This is a guide to Accounts Receivable Journal Entry. Here we also discuss the introduction and examples of accounts receivable journal entry along with a detailed explanation. You may also have a look at the following articles to learn more –
