Updated July 10, 2023
Definition of Accounts Receivable
Accounts Receivable are assets for any organization as it is the amount that is receivable from the outside parties against the sale of goods, provision of services, sale of property, and others related to business transactions.
They are considered the most liquid asset to the organization after the cash and hence accounts receivable play a vital role in the working capital cycle of the organization. The following article provides an outline for the Accounts Receivable Example.
Explanation
Accounts Receivable is the amount against the sale to debtors, providing services payment of which is to be received later, against a loan from the borrower, against property sold from the purchaser, etc. Generally, the accounts receivable have a debit balance and are shown as an organization’s asset. Accounts receivables are part of the working capital cycle of the organization. Therefore, the faster the collection against the receivables, the more the working capital flow will be to the organization, which increases the company’s liquidity position. It is considered a short-term asset as the credit period generally ranges from 15 days to 3 months, and they are legally enforceable claims.
Accounts Receivable Example
Given below are the Accounts Receivable Examples:
Example #1
A Purchased the goods on credit from S, and the credit period allowed by A is 15 days. So A is the Debtor for S, and the amount from S is accounts receivable.
Various Examples of Accounts receivables considering different situations are as under:
Example #2
On 01.04.2020, A Purchased goods from X amounting to $ 50,000, where the credit Period given is 30 days. After 30 days, i.e., on 01.05.2020, A paid the X in full. Pass the necessary journal entry to record the above accounts receivable transactions in X’s book.
Solution:
Entry in books of X
| Date | Particulars | Debit | Credit |
| 01.04.2020 | A’s a/c …Dr | $50,000 | |
| To sales a/c | $50,000 | ||
| (Entry to record credit sales to A worth $50,000) | |||
After 30 days of receipt of payment
| Date | Particulars | Debit | Credit |
| 01.05.2020 | Cash or Bank A/c Dr | $50,000 | |
| To A’s A/c | $50,000 | ||
| (Entry to record receipt of money against credit sales on 01.04.2020) | |||
Example #3
An Ltd Sold goods to X Ltd worth $ 70,000, out of which Trade Discount is 1% of the gross amount due to bulk purchase by X where the credit period is 45 days. If the Debtor pays before 30 days, an additional cash discount will be allowed as 1 % of the amount receivable. X Ltd paid the full amount after 20 days of purchase. Record the above transactions and pass the journal entries in the books of A Ltd.
Solution:
| Date | Particulars | Debit | Credit |
| X Ltd. A/c Dr | $ 69,300.00 | ||
| To sales A/c | $69,300.00 | ||
| (Entry to record credit sales made to Debtor X Ltd. worth $ 70,000, trade discount allowed is 1%, i.e., 700) | |||
After 20 days, when payment is made,
| Date | Particulars | Debit | Credit |
| Cash or Bank A/c Dr | $ 68,607.00 | ||
| Discount Allowed A/c Dr | $ 693.00 | ||
| To X Ltd A/c | $69,300.00 | ||
| (Entry to record amount Received from Debtor X Ltd. after allowing cash discount @ 1% for prompt payment. | |||
Example #4
MNP Ltd Sold goods to SAP Ltd worth $100,000, out of which Trade Discount is 2% of the gross amount due to bulk purchase by SAP Ltd. The credit period is 60 days, but if the Debtor pays before 30 days, an additional cash discount will be allowed as 1 % of the amount receivable. As a result, SAP Ltd became bankrupt, and only $ 70,000 was received from his estate. Record the above transactions in the books of MNP Ltd.
Solution:
| Date | Particulars | Debit | Credit |
| SAP Ltd. A/c Dr | $ 98,000.00 | ||
| To sales A/c | $ 98,000.00 | ||
| (Entry to record credit sales made to Debtor SAP Ltd. worth $ 100,000 trade discount allowed is 2%, i.e., $2,000) |
On becoming bankrupt:
| Date | Particulars | Debit | Credit |
| Cash or Bank A/c Dr | $ 70,000.00 | ||
| Bad debts A/c Dr | $ 28,000.00 | ||
| To SAP Ltd. A/c | $ 98,000.00 | ||
| (Entry to record Amount received from Debtor worth $ 70,000 and $ 28,000 cannot be recovered due to bankruptcy of SAP Ltd.) | |||
Example #5
Bank of America lent the loan of $ 200,000 to ABC Ltd. on 01st January 2018 for purchasing the property for business; where the loan is given on the following conditions:
The rate of interest is 12% P.a.
The tenure of the loan is 5 Years, and EMI is to be paid at the end of every year.
Determine the accounts receivables at the end of each year.
Solution:
EMI = Loan amount / cumulative PV factor for 5 years @ 12%
- =200000/3.60477
- = $55,482.04
Interest for Year 1:
- = 200000 * 12%
- = $24,000.00
| Year | Opening Balance | Interest | Principal | Installment | Closing Balance |
| 1 | $200,000 | $24,000 | $31,480 | $ 55,480 | $ 168,520 |
| 2 | $168,520 | $20,232 | $35,248 | $ 55,480 | $ 133,272 |
| 3 | $133,272 | $15,993 | $39,487 | $ 55,480 | $ 93,785 |
| 4 | $93,785 | $11,255 | $44,225 | $ 55,480 | $ 49,560 |
| 5 | $49,560 | $ 5,948 | $49,532 | $ 55,480 |
| Date | Particulars | Debit | Credit |
| Loan to ABC Ltd. A/c Dr | $ 200,000 | ||
| To Cash or Bank A/c | $ 20,000 | ||
| (Entry to record the loan of $ 200,000 being lent to ABC Ltd. at the interest rate of 12%) | |||
| Year 1 | |||
| Date | Particulars | Debit | Credit |
| Cash or Bank A/c Dr | $ 55,480 | ||
| To Loan to ABC Ltd. A/c | $ 31,480 | ||
| To Interest on Loan A/c | $ 24,000 | ||
| (Entry to record transaction when EMI at the end of Year 1 is received from ABC Ltd consisting of principal and interest) | |||
| Date | Particulars | Debit | Credit |
| Interest on Loan A/c Dr | $ 24,000 | ||
| To Profit and Loss A/c | $ 24,000 | ||
| (Entry to record interest on the loan being recorded as income) | |||
| Year 2 | |||
| Date | Particulars | Debit | Credit |
| Cash or Bank A/c Dr | $ 55,480 | ||
| To Loan to ABC Ltd. A/c | $ 35,248 | ||
| To Interest on Loan A/c | $ 20,232 | ||
| (Entry to record transaction when EMI at the end of Year 2 is received from ABC Ltd consisting of principal and interest) | |||
| Date | Particulars | Debit | Credit |
| Interest on Loan A/c Dr | $ 20,232 | ||
| To Profit and Loss A/c | $ 20,232 | ||
| (Entry to record interest on the loan being recorded as income) | |||
| Year 3 | |||
| Date | Particulars | Debit | Credit |
| Cash or Bank A/c Dr | $ 55,480 | ||
| To Loan to ABC Ltd. A/c | $ 39,487 | ||
| To Interest on Loan A/c | $ 15,993 | ||
| (Entry to record transaction when EMI at the end of Year 3 is received from ABC Ltd consisting of principal and interest) | |||
| Date | Particulars | Debit | Credit |
| Interest on Loan A/c Dr | $ 15,993 | ||
| To Profit and Loss A/c | $ 15,993 | ||
| (Entry to record interest on the loan being recorded as income) | |||
| Year4 | |||
| Date | Particulars | Debit | Credit |
| Cash or Bank A/c Dr | $ 55,480 | ||
| To Loan to ABC Ltd. A/c | $ 44,225 | ||
| To Interest on Loan A/c | $ 11,255 | ||
| (Entry to record transaction when EMI at the end of Year 4 is received from ABC Ltd consisting of principal and interest) | |||
| Date | Particulars | Debit | Credit |
| Interest on Loan A/c Dr | $ 11,255 | ||
| To Profit and Loss A/c | $ 11,255 | ||
| (Entry to record interest on the loan being recorded as income) | |||
| Year 5 | |||
| Date | Particulars | Debit | Credit |
| Cash or Bank A/c Dr | $ 55,480 | ||
| To Loan to ABC Ltd. A/c | $ 49,532 | ||
| To Interest on Loan A/c | $ 5,948 | ||
| (Entry to record transaction when EMI at the end of Year 5 is received from ABC Ltd consisting of principal and interest) | |||
| Date | Particulars | Debit | Credit |
| Interest on Loan A/c Dr | $ 5,948 | ||
| To Profit and Loss A/c | $ 5,948 | ||
| (Entry to record interest on the loan being recorded as income) | |||
Conclusion – Accounts Receivable Example
Account receivables are the assets of the company. It may be in the form of debtors, a loan, advance, etc. Generally, it has a debit balance and is shown in current assets as accounts receivable on the balance sheet. However, when the advance is received before sales are made, the account receivable will have a credit balance, which will be reduced from the debit balance, and net receivables are to be shown on the balance sheet. Therefore, it is treated as a liquid asset and part of operational funds.
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