How to record accounts receivable

Introduction

In accounting, accounts receivable is a current asset that presents the right to receivable the cash payment from the other party. Likewise, we usually record the accounts receivable with the journal entry of debiting the accounts receivable for the credit sales transactions that we make to our customers.

In business, the accounts receivable usually represent the money that the customers owe us, as a vendor or a supplier, for the goods that they have purchased on account. And it is common that we may sell the goods on credit to the customers that have a good business relationship with us in order to increase our sales volumes.

This usually happens a lot in the merchandise business where we purchase merchandise goods from our suppliers in order to sell them to our customers for a profit. Likewise, there usually will be many accounts receivable transactions during the accounting period if we run the merchandise business.

How to record accounts receivable

We can record the accounts receivable with the journal entry of debiting the accounts receivable and crediting the sales revenue account.

Account	Debit	Credit
Accounts receivable	$$$
Sales revenue		$$$

The accounts receivable in the journal entry that we record here will increase the total assets on the balance sheet as a result of the increase in the accounts receivable balance. At the same time, the total revenues on the income statement will also increase by the same amount as a result of the credit sales that we have made.

On a later date, when we receive the cash payment from the customer for the credit sale above, we can make another journal entry to record the accounts receivable collection by debiting the cash account and crediting the accounts receivable.

Account	Debit	Credit
Cash	$$$
Accounts receivable		$$$

This journal entry is made to record the cash received in the form of the accounts receivable collection as well as to eliminate (or reduce) the accounts receivable that we have recorded above.

Accounts receivable example

For example, on January 31, we have made a $10,000 credit sale of the merchandise goods to one of our customers that have a good business relationship with us. Later, on February 28, we receive the cash payment of $10,000 from the customer to settle the credit purchase that they have made on January 31.

In our business, we use the periodic inventory system in order to manage and control the merchandise inventory goods that we have on hand. And these $10,000 merchandise goods that we have sold to the customer have the original cost of $6,000 on the balance sheet.

In this case, we can record the $10,000 credit sales on January 31 to the accounts receivable with the journal entry of debiting the accounts receivable and crediting the sales revenue accounts as below:

January 31:

Account	Debit	Credit
Accounts receivable	10,000
Sales revenue		10,000

This journal entry of recording the $10,000 of the accounts receivable as a result of the credit sale that we have made to the customer will increase both total assets on the balance sheet and total revenues on the income statement by $10,000 as January 31.

Later, on February 28, when we have received the $10,000 cash payment from the customer to settle their credit purchase, we can record the accounts receivable collection of the $10,000 amount as below:

February 28:

Account	Debit	Credit
Cash	10,000
Accounts receivable		10,000

This journal entry will eliminate the $10,000 accounts receivable that we have previously recorded on January 31 after making the credit sale above.

Note:

It may be useful to note that if we use the perpetual inventory system in our merchandising business, we will also need to record the cost of goods sold in the recording of the sales transaction above. And that can be done by making another journal entry with the debit of the cost of goods sold account and credit of the inventory accounts.

This is due to, under the perpetual inventory system, we need to update the balance of the inventory perpetually. In other words, every time there is an inventory in or an inventory out, we need to record it to the inventory account in order to update the inventory balance.

For instance, if we use the perpetual inventory system in the example above, instead of the periodic inventory system, we will need to also record the cost of goods sold of $6,000 together with the journal entry of accounts receivable on January 31 as below:

Perpetual inventory system:

Account	Debit	Credit
Accounts receivable	10,000
Sales revenue		10,000

Account	Debit	Credit
Cost of goods sold	6,000
Inventory		6,000