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Accounts Receivable Explained

Accounts receivable refers to money owed by customers who have purchased goods or services on credit. It represents an asset on the balance sheet until payment is received from customers. When a sale is made on credit, the amount is recorded as an increase to accounts receivable to track amounts owed by customers. As payments are received, the accounts receivable balance is reduced through journal entries that credit the customer and debit cash. Large businesses may track accounts receivable using enterprise resource planning software rather than physical sales ledgers.

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202 views2 pages

Accounts Receivable Explained

Accounts receivable refers to money owed by customers who have purchased goods or services on credit. It represents an asset on the balance sheet until payment is received from customers. When a sale is made on credit, the amount is recorded as an increase to accounts receivable to track amounts owed by customers. As payments are received, the accounts receivable balance is reduced through journal entries that credit the customer and debit cash. Large businesses may track accounts receivable using enterprise resource planning software rather than physical sales ledgers.

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Nomadic World Tour
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https://www.accountingcapital.

com/revenues/accounts-receivable/

Accounts Receivable – Definition


The customer accounts (debtors) who owe money to a business for purchasing
goods on credit are called accounts receivable. When the money is received within
the same accounting period it becomes part of the company’s operating revenue,
however, if not received in the same year it becomes “trade debtors” which is
another name for accounts receivable. It is also commonly abbreviated as “AR”. The
entire life-cycle is termed as “O2C” (Order to Cash). 

In layman terms, the total amount which is yet to be collected by debtors as per a
firm’s sales book is known as accounts receivables. Large firms using ERP packages
replace traditional sales book with sales ledger control account. 

The buyer can be a sole trader, a partnership firm, a private company, etc. It is a short-term
addition, hence an asset that is supposed to be received from the customers. Account’s
receivables are shown on the asset side under the head current assets (right-hand side of
a horizontal balance sheet).

Example
Let us assume that you sold goods worth 10,000 to one of your buyers who is
supposed to pay you within 45 days of receipt of invoice. Now, you send the
customer a bill for 10,000. In this case, the amount acts as “dues to be received” and
shall be booked in your records as accounts receivable.

It is similar to the situation where your mobile phone company generates an invoice
on the 1st day of a month and gives you 30 days to pay the bill. It is an account
receivable for the mobile phone company.

Key Highlights

1. They are created when a business sells goods on credit.


2. They should be collected from the customers within the agreed period. 
3. If goods are returned by the buyer during the allowed time limit, then a credit note is
sent by the seller to notify the buyer that he has been provided appropriate credit.
This cancels out his payment & results in a reduction of total accounts receivable.
https://www.accountingcapital.com/revenues/accounts-receivable/

At the time of recording a credit sale and billing the customer

Accounts Receivable A/C Debit

 To Sales (on credit) A/C Credit

(This can also be recorded at a particular customer level subledger wise, in that


case, the customer who is billed will be debited)

Related – Journal entry for recovery of bad debts

Cash A/C or Bank A/C Debit

 To Accounts Receivable A/C Credit

At the time of money received from the customer

(This can also be recorded at a particular customer level subledger wise, in that
case, the customer paying for the goods/services will be credited)

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