Journal Entry for Collection of Accounts Receivable
In business, it is common that we make credit sales to our customers and only collect the accounts receivable at the later date. Likewise, we may need to make the journal entry for collection of accounts receivable often during each accounting period.
In a normal circumstance, collection of accounts receivable is a straightforward transaction by removing the debt the customers owe for the amount we receive as the collection of cash for the previous credit sales. This transaction is basically reducing the balance of accounts receivable for the increase in the cash account on the balance sheet.
However, sometimes, we may receive the cash payment from the customers that we thought would not pay back the debt and the accounts receivable of their accounts were already written off from the balance sheet. In this case, we need to put back their accounts on the balance sheet first before we make the journal entry for the collection of accounts receivable. Of course, this may be a rare case as we don’t usually write off the accounts receivable easily.
Journal entry for collection of accounts receivable
We can make the journal entry for the collection of accounts receivable by debiting the cash account for the amount received and crediting the accounts receivable to remove the collected amount from the balance sheet.
In this journal entry, while the balance of the cash account increases, the balance of the accounts receivable decreases in the same amount. Likewise, there is no impact on the total assets on the balance sheet.
Collection of accounts receivable previously written off
Sometimes, we might have already written off the customers’ accounts when we have determined that they are highly likely to be uncollectible. However, our judgment may be wrong and the customers may come to pay us the amount they owe after we had already written off their accounts from the balance sheet. If that is the case, we need to restate the accounts receivable previously written off back first before making the journal entry for the collection.
Likewise, we can make the journal entry for the collection of accounts receivable previously written off by reversing the written off entry with the debit of the accounts receivable and the credit of the allowance for doubtful accounts. And then, we can record the collection of accounts receivable with the debit of the cash account and the credit of the accounts receivable to record the cash collected.
Restate the accounts receivable to the balance sheet:
|Allowance for doubtful accounts||$$$|
Collection of accounts receivable:
Collection of accounts receivable example
For example, on December 10, we sell $1,000 of goods to one of our customers on credit. Later, on January 10 in the next accounting period, we receive the payment of $1,000 in cash from our customer to pay for this credit purchase.
In this case, we can make the journal entry for accounts receivable on December 10, and the journal entry for the collection of accounts receivable on January 10, as below:
For example, on January 15, we have received a $500 cash payment from one of our customers who made the credit purchase last year. However, his account had been recorded as a doubtful account, and then it was written off later due to the long outstanding of nonpayment.
In this case, we need to restate the $500 of accounts receivable back first before recording the collection of this amount.
Likewise, we can make the journal entry on January 15, for this $500 of the collection of accounts receivable previously written off as below:
Restate the $500 of accounts receivable to the balance sheet:
|Allowance for doubtful accounts||500|
Collection of $500 accounts receivable:
It may be useful to note that the $500 of allowance for doubtful accounts that is put back to the balance sheet in the journal entry above will be eliminated when we make the estimation and record the allowance for doubtful accounts for accounts receivable at the end of the accounting period. This is because the customer has already paid the owed amount of $500 and the accounts receivable has already been removed, so it makes sense that the $500 of the allowance of doubtful accounts will be also removed too.