When a business sells services on account, it means that it provides services to a customer on credit, and the customer agrees to pay for those services at a later date.
In accounting, this transaction is recorded through journal entries to accurately reflect the financial impact on the business.
The specific journal entries depend on the accounting method used by the business (e.g., accrual accounting or cash accounting).
Let’s assume a scenario where a service is provided on account.
What is On Account Journal Entry?
Click here to understand more about on account journal entry.
Service Provided on Account
When the service is provided, the business recognizes revenue even though cash hasn’t been received yet.
The journal entry is as follows:
Service Revenue [Credit] XXXX
Accounts Receivable [Debit] XXXXService Revenue (Credit)
This increases the revenue account, reflecting the amount of revenue earned from providing services.
Accounts Receivable (Debit)
:This increases the accounts receivable account, representing the amount the customer owes the business.
Subsequent Cash Collection:
When the customer pays for the services, the business records the cash receipt.
The journal entry is as follows:
Cash [Debit] XXXX
Accounts Receivable [Credit] XXXX
Cash (Debit)
This increases the cash account, representing the amount of cash received.
Accounts Receivable (Credit)
This decreases the accounts receivable account, reflecting the reduction in the amount the customer owes.
These entries ensure that the financial statements accurately reflect the revenue earned and the accounts receivable outstanding.
It’s important to note that the above entries assume the use of accrual accounting, where revenue is recognized when it is earned, regardless of when the cash is received.
If the business uses cash accounting, revenue is recognized only when the cash is received, and the journal entries would be different. In cash accounting,
- What is a Bank Reconciliation Accountant? - November 26, 2023
- 7 Steps to Make a Bank Reconciliation - November 26, 2023
- Analyzing Accounts Receivable in Excel (with example) - November 25, 2023