Today, you’ll learn about the accounts receivable debit or credit.
When dealing with accounts receivable, you might find it crucial to understand whether you should debit or credit this account.
Accounts receivable is a record of the money owed by customers for goods or services they’ve received but haven’t paid for yet.
In this post, we’ll delve into the principles behind debiting and crediting accounts receivable, and how you can apply them to your financial management.
The Basics of Double-Entry Bookkeeping
In double-entry bookkeeping, every financial transaction has two sides: a debit and a credit.
To determine whether accounts receivable should be debited or credited, it’s important to understand the foundational principles of this accounting system:
A debit entry increases an asset or expense account or decreases a liability or equity account.
A credit entry increases a liability or equity account or decreases an asset or expense account.
The essence of double-entry bookkeeping is that every transaction affects at least two accounts, with the total debits always matching the total credits.
This ensures the accuracy of financial records and maintains the balance of the accounting equation (Assets = Liabilities + Equity).
Recording Sales and Accounts Receivable
When your business makes a sale on credit, meaning the customer doesn’t pay immediately but will do so at a later date, it impacts two key accounts:
- Revenue and
- Accounts receivable.
Let’s break down how these transactions are recorded:
1. Recording a Sale on Credit
Imagine your company sells $1,000 worth of products to a customer on credit. Here’s how this transaction would be recorded:
- Accounts Receivable: You debit accounts receivable for $1,000. This indicates an increase in the amount owed to your company by the customer.
- Revenue (e.g., Sales): You credit revenue (e.g., Sales) for $1,000. This credit recognizes the revenue your company has earned, even though you haven’t received the cash yet.
This entry follows the basic rule of double-entry bookkeeping: for every debit, there is a corresponding credit.
2. Receiving Payment from the Customer:
When the customer eventually pays the invoice, the entry is made as follows:
- Cash (or Bank Account): Debit cash (or bank account) by $1,000. This indicates an increase in your company’s cash holdings.
- Accounts Receivable: Credit accounts receivable by $1,000. This credit entry reduces the amount owed by the customer.
Again, this transaction adheres to the principles of double-entry bookkeeping, ensuring the balance of the accounting equation.
When to Debit or Credit Accounts Receivable
To determine whether to debit or credit accounts receivable, you need to consider the context of the transaction. Here are common scenarios to help you make the right choice:
1. Making a Sale on Credit
Debit Accounts Receivable: When you make a sale on credit, you should debit accounts receivable. This reflects an increase in the amount owed to your company by the customer.
Credit Revenue: In parallel, credit the revenue account to recognize the income earned. Revenue is realized when the sale takes place, not when you receive the cash.
2. Receiving Payment from a Customer
Debit Cash (or Bank Account): When a customer pays their outstanding invoice, you should debit the cash or bank account. This entry marks an increase in your cash holdings.
Credit Accounts Receivable: Simultaneously, credit accounts receivable to reduce the amount owed by the customer.
3. Making Adjustments
Sometimes, adjustments are necessary, such as when a customer disputes part of the invoice or returns goods:
- Debit Accounts Receivable: If a customer disputes part of the invoice or returns goods, debit accounts receivable to decrease the amount owed.
- Credit Sales Returns or Allowances: Correspondingly, credit an account like “Sales Returns” or “Sales Allowances” to recognize the reduction in revenue.
The key is to understand how the transaction affects your financial accounts. Accounts receivable is a current asset, so you debit it when you expect to collect funds and credit it when the collection is confirmed or when you need to reduce the amount owed for any reason.