Accounts Receivables and Entries

Accounts receivables can be considered as an investment made by the business that includes both risks and returns. Returns in the form of easily acquiring new customers and risk in the form of non-payments called bad debts.

The customer accounts (debtors) who owe money to a business for purchasing goods on credit are called accounts receivable. 

In other words, when a company sells goods on credit, the money which the customer owes to the company is termed as accounts receivable.

It is usually recorded as an asset in the company’s balance sheet since they are outstanding payments due in the future and provide value to the company.

 

WHY DO COMPANIES HAVE ACCOUNTS RECEIVABLE ?

 

Accounts Receivable forms a major part of the company’s asset. It generates cash inflow in the books of the company. It is very important because it affects the company’s future cash flow.

In addition to this, allowing credit sales can enable a company to boost its sales and maintain good customer relations.

Further, the investors can determine the collection efficiency of the company by analyzing the accounts receivable of a company.

 

JOURNAL ENTRIES FOR ACCOUNTS RECEIVABLES :

Following are main journal entries of account receivables.

  1. When goods are sold on credit –

Accounts Receivable A/c    (Dr)    xxx

To Sales A/c         ( Cr)                      xxx

 

  1. When money is received from the customer

Cash A/C or Bank A/C       (Dr )         xxx

To Accounts Receivable A/c   (Cr)          xxx

 

  1. When account receivables are converted into bill receivables –

Bill Receivable A/C     (Dr )                                  xxx

To Accounts Receivables or Debtor  A/C  (Cr )        xxx

 

  1. To write off accounts receivable as a bad debt- 

Bad Debts Expense Ac   (Dr )                xxx

To Accounts Receivable A/c   (Cr)            xxx

 

  1. To record credit note issued to a customer-

Revenue A/c   (Dr)                              xxx

To Accounts Receivable A/c   ( Cr)         xxx

 

  1. To record cash received after an accounts receivable has been written off –

Cash A/c  (Dr)                                       xxx

To Accounts Receivable A/c   (Cr)        xxx

 

Thus, in layman terms, AR is any amount of money owed by customers for purchases made on credit and is listed as current asset in the company’s balance sheet.

Accounting & Finance for Banking

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