What Is an Accounts Receivable Journal Entry?
An accounts receivable journal entry is the recording of an accounts receivable transaction in the business’s accounting records.
It is an essential step in properly documenting this financial activity.
Accounts receivable is an accounting term that refers to sales for which payment has not yet been received. The customer has not paid for the good or service received at the time of the transaction.
Instead, the business has extended credit to the customer and expects to receive payment for the transaction at some point in the future.
Like all other financial activity, accounts receivable must be entered into the business’s accounting records. This is done through journal entries.
Journal entries are the building blocks of a business or organization’s accounting system. They record all transactions for a business. They are typically entered into the general journal or general ledger, and sometimes into a subsidiary ledger.
Journal entries are first made to the general journal in the form of raw data that includes basic information about the transactions and are arranged in a chronological format by the date of the transaction. This information is subsequently posted to the general ledger or subsidiary where it is arranged in a manner that instead reflects the nature of the transaction.
The general ledger is a master accounting document that records and compiles all financial transactions for a business. The data contained in the general ledger is used to produce other financial statements that support analysis of the business, its finances, and performance, such as the balance sheet, income statement and cash flow statement.
How Are Accounts Receivable Journal Entries Recorded?
Most businesses have transactions that are executed on credit, which is to say that they have not been paid for in full with cash at the time of the transaction.
To properly account for these transactions, they will be recorded as an accounts receivable. In contrast, a transaction for which the business owes payment to another vendor is referred to as an account payable.
The first step in recording accounts receivable will be the invoice. It will have valuable information about the transaction, the customer, the amount of the sale, the amount of credit extended, and the terms of payment.
Based on the invoice, the transaction will be entered into the business’s accounting books in the form of a journal entry. The journal entry will record the transaction, its date, and the amount that is receivable.
All journal entries are made according to the double-entry system of accounting, which operates on the principal that every transaction has an equal and opposite effect in at least two different places.
For this reason, there will be two journal entries for every accounts receivable transaction. One entry will record the full amount of the transaction. The other entry will record the amount that is receivable, or unpaid.
If credit has been extended to the customer for the entire amount of the sale, then the amount that is receivable will equal the full value of the sale. If the customer has paid for part of the transaction at the point of sale and is only taking credit for the remaining portion, then the accounts receivable journal entry will reflect that amount.
Because payment for the transaction is expected at some point in the near future, typically in two months or less, accounts receivable transactions are considered assets. Assets are any financial resource that has monetary value and which can be converted to cash by the business at a later time.
Because of the relatively short amount of time it typically takes to collect payment for accounts receivable, they are considered current assets or short-term assets. A short-term asset is any asset that can be converted to cash in one year or less.
According to the double entry system, all assets are recorded as a debit, and all revenue transactions are recorded as a credit. Therefore, when a journal entry is made for an accounts receivable transaction, the value of the sale will be recorded as a credit to sales. The amount that is receivable will be recorded as a debit to the assets. These entries balance each other out.
FAQ
What Is an Example of an Accounts Receivable Journal Entry?
If a restaurant supply company has sold $500 worth of utensils to Joe’s Deli, the transaction will be recorded in the company’s ledger as a $500 debit to assets as an accounts receivable. A corresponding journal entry will be made as a $500 credit to sales.
As Joe’s Deli makes monthly payments of $100, journal entries will be made as credits to the account receivable and as debits to cash. After five months, the accounts receivable asset will be reduced to zero, and the cash account will have increased by $500. This amount will balance with the original $500 credit entry to sales.
Why Are Accounts Receivable Journal Entries Important?
Properly recorded journal entries help a business manage and track its accounts receivable, which are an important part of the business’s financial activity.
Accounts receivable journal entries support other important functions of the business. For example, the business must collect payment on its accounts receivable. Before initiating collections, the business must make an evaluation of its accounts receivable.
To aide in this evaluation, the business will produce an aging report. An aging report will provide the business with a snapshot of the status of all of its accounts receivable by categorizing them according to how long they are past due.
Journal entries provide valuable information to the accounting managers to support this process by providing essential information for compiling the aging report.
Accounts receivable are an important metric that help the business analyze its performance. For example, the receivables-to-sales ratio measures the accounts receivable in proportion to its sales for a given period of time. A high number shows that a greater number of sales are generating accounts receivable, as opposed to cash. This reveals a higher level of risk in the customer base and is not a good sign for the business.
The receivables turnover ratio is the inverse of the receivables-to-sales ratio. It measures sales as a proportion of accounts receivable. In contrast, a higher number reveals a better success rate in collecting payment accounts receivable, which is a positive sign for the business.
Lastly, the days-sales-outstanding is calculated as the average number of accounts receivables divided by sales then multiplied by 365. This ratio shows how long it takes a company to convert its receivables into cash.
Accurate accounts receivable journal entries support all of the above analyses.
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Accounts receivable journal entries play a pivotal role in a company's accounting system, reflecting transactions where customers haven't made immediate payments for goods or services received. As an enthusiast in accounting and finance, I've worked extensively with journal entries and accounting processes, particularly concerning accounts receivable management.
To break down the concepts covered in the article:
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Accounts Receivable: This refers to sales for which payment is outstanding, indicating that a customer has received goods or services but hasn't made the payment at the time of the transaction. It signifies credit extended by a business to a customer.
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Journal Entries: These are the fundamental recordings of financial transactions. In the case of accounts receivable, journal entries document the transaction date, the amount receivable, and the nature of the sale. These entries follow the double-entry accounting system, ensuring equal and opposite effects in at least two different accounts.
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General Ledger: This master document accumulates and records all financial transactions. It serves as the basis for financial statements like the balance sheet, income statement, and cash flow statement, providing crucial insights into a business's financial health and performance.
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Double-Entry System: This accounting principle states that every transaction has an equal and opposite effect in at least two different accounts. For accounts receivable, this involves recording the full transaction amount as a credit to sales and the amount receivable as a debit to assets.
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Assets: Accounts receivable, being future expected payments, are recorded as assets. They're categorized as current assets or short-term assets because they're anticipated to convert into cash within a relatively short period, usually within a year.
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Accounting Ratios: These metrics, such as receivables-to-sales ratio, receivables turnover ratio, and days-sales-outstanding, provide insights into a company's financial performance. They analyze the efficiency of collections and the relationship between sales and outstanding receivables.
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Importance of Journal Entries: Properly recorded journal entries are crucial for managing accounts receivable, aiding in evaluations like aging reports, which categorize receivables based on their due dates. They're integral in assessing a company's financial performance and risk associated with outstanding payments.
This comprehensive understanding of accounts receivable journal entries helps in not only recording transactions accurately but also in utilizing financial data to make informed business decisions, manage risks, and evaluate performance metrics.
