How Do You Record Journal Entry for Accounts Receivable? (Explained)

Overview

Businesses around the world sell goods to customers on credit in order to boost sales. This is done to allow customers a more flexible payment plan. When a business sells its goods or services to a customer on credit, that is, when the customer is yet to pay for these goods and services, this is known as credit sales and they are regarded as Accounts Receivable by the business.

These credit sales are an asset for the business and therefore are listed under the current assets section in the balance sheet of the business. Businesses use an Accounts receivable Journal to record these credit sales.

The Accounts Receivable journal is the first book of accounting for recording an entry when a credit sale is made. The journal altogether shows the combined value of all the credit sales and money owed by the customers of the business. A balance in the accounts receivable journal implies that some portion of the revenue is still outstanding for the business.

This is in line with the accruals concept of accounting which must be used while recording revenues and expenses as per the rules established by GAAP and IFRS.

It is essential that a business manages its accounts receivables properly as mismanagement of accounts receivable can give rise to cash flow problems for the business. While it is good that a business may have many customers, it is also essential that a business must ensure that these customers pay on time so that the business does not run out of cash.

Journal Entries for Accounts Receivable

The accounts receivable journal is used for a number of sales-related entries. These include the following:

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Sales of Goods on Credit

When a business makes sales to a customer on credit, a journal entry is made to record these sales. This is recorded by debiting the accounts receivable account and crediting the sales account.

Example

Martin & Co. sells goods worth $1000 on credit to customer ABC Co. on 30 June 2020

Martin & Co. will record this through the following journal entry:

DateDetailsDebitCredit
30-JuneAccounts Receivable$1000 
 Sales $1000
Sales on credit to ABC Co. are worth $1000.

Receiving Payments for Credit Sales

When the customer pays for the goods, the business must record this payment to settle the customer account in the books of the business. This is done by debiting cash and crediting Accounts Receivable.

Example

On 10 July 2020, Martin & Co. receives payment from customer ABC Co. of $1000 for goods sold on 30 June 2020.

Martin & Co. will record this through the following journal entry:

DateDetailsDebitCredit
10-JulyCash$1000 
                      Accounts Receivable $1000
Payment received from ABC Co. for goods sold on credit.

Allowing Discount to Customers for Goods Sold on Credit

Some businesses allow discounts to customers when they clear their due invoices before the payment due date. This is done to encourage customers to pay early and as an incentive, the business offers a certain percentage of the invoice to be reduced as a part of the discount. The discount terms may vary from business to business.

However, when a business receives such payment against credit sales and allows a discount to the customer, this is recorded in the journal with an entry whereby the business will debit the Cash account and Sales Discount accounts (or Discount Allowed account) and will credit the Accounts Receivable account at the same time.

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Example

Martin & Co. sold goods worth $1000 on credit to customer ABC Co. on the credit term 2/10 net 30. The payment for these sales is received on 10th July 2020.

The credit term mentioned above implies that if the customer pays his invoice within 10 days of sales, they will receive a 2% discount on the total amount due. Otherwise, the payment must be made within a maximum of 30 days.

Martin & Co. will record this through the following journal entry:

DateDetailsDebitCredit
10-JulyCash$980 
 Sales Discount$20 
 Accounts Receivable $1,000
Discount allowed to ABC Co. on receiving full payment of $980 against invoice of $1000.

Return of Goods Sold on Credit

Most businesses usually allow customers to return goods after sales when there is an issue with the product or if the product is of bad quality or doesn’t fit the requirements of the buyer. In this case, the businesses must make the necessary changes to the Accounts Receivable journal in order to ensure that the journal does not overstate sales and any returns are accounted for.

In such a case, entries are made to the sales return account or sales account, accounts receivable and inventory, and cost of goods sold. The business will debit the sales return account while crediting the accounts receivable. 

Example

ABC Co. returned goods worth $200 on 10th July 2020.

Martin & Co. will record this through the following journal entry:

DateDetailsDebitCredit
10-JulySales return (or sales account)$200 
 Accounts Receivables $200
 
Return of goods worth $200 sold to ABC Co.

To Write Off Bad Debts Expense

When making credit sales, there is always a risk that businesses consider that the customer might fail to pay these debts, which could end up as a loss for the business. When such a situation arises, the business must account for this loss.

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The loss incurred when a customer fails to pay their business debts is known as Bad Debt Expense. The business debits the Bad Debt Expense Account and credits the Accounts Receivable account, in this case, to reduce the receivables by the amount of the loss incurred.

Example

On 31st July 2020, it was found that ABC Co. has gone bankrupt and will not be able to pay the amount owed to Martin & Co.

Martin & Co. will record this through the following journal entry:

DateDetailsDebitCredit
31-JulyBad Debts Expense$1000 
 Accounts Receivables $1000
To write off bad debts expense for the amount owed by ABC Co.

When A Previously Written Off Bad Debt Is Recovered

Sometimes businesses are able to recover a bad debt that had been previously written off. In such cases, the business must reverse the previous entry made to Accounts receivable and Bad Debt Expense Account.

This is done by debiting the Accounts receivable first with the recovered amount and crediting bad debt expense with the same amount. Further, the business must then show the receipt of cash in settlement of the customer account by Debiting Cash and Crediting Accounts Receivable. 

Example

Martin and Co. receive $1000 from ABC Co. on 31st December 2020 to settle previously outstanding des that were written off.

Martin & Co. will record this through the following journal entry:

DateDetailsDebitCredit
31-DecAccounts Receivable$1000 
 Bad Debts Expense $1000
Previously written off amount for ABC Co. has been recovered.
DateDetailsDebitCredit
31-DecCash$1000 
 Accounts Receivable $1000
Payment received from ABC Co. for goods sold on credit.

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