Table of Contents
What Is Accounts Receivable in Accounting? 2
What is so important about AR? 2
Is Accounts Receivable Debit or Credit? (The Straight Answer) 3
A Brief About the Accounts Receivable Process. 4
The Accounting Equation & Where the Accounts Receivable Fits In. 5
Accounts Receivable on the Balance Sheet and What Credit Balances Mean. 6
How NCRI Can Help You Master Accounts Receivable. 7
Have you ever glanced at the books of your business and found yourself asking the question: Is accounts receivable a debit or a credit? Well, you are not the only one. This is an accounting question that many small business owners trip over. The problem is that if it is not understood, it can lead to messy financial records, wrong balance sheets, and poor cash flow choices. Here is a reality check: Atradius says that about 50 percent of B2B invoices in the U.S. are late. Bad debts average nearly 8 percent of these invoices. It is a lot of money in limbo.
The upside? When you understand why accounts receivable is a debit and how to record it, you will see your financial health more clearly. We will explain the concept clearly. We will guide you through the accounts receivable process. We will give examples of journal entries. We will also show you what to do if something goes wrong. All of this will be in this guide.
What Is Accounts Receivable in Accounting
Accounts receivable (AR) is the money that customers owe you. This happens after you provide goods or services, but before they pay. When you send an invoice and allow them 30 days to pay, the money that is not paid goes into your AR account. It is a current asset since you anticipate receiving it soon, typically within one year.
What is so important about AR?
Since it directly depends on your cash flow. Good accounts receivable implies that you are always receiving payments, and this keeps your business running. Inefficiently run AR, however, may strangle your liquidity and leave you scrambling to meet your costs.
According to the U.S. Small Business Administration and Atradius, 50 percent of B2B invoices are late. The average bad debt write-off is 8%. That is a huge drain on working capital unless controlled.
AR in Daily Business
Consider that you are running a graphic design company. You complete a $1200 project for a client, send the invoice, and allow them 30 days to pay. That $1200 is an asset to your AR account until the client pays the money.
AR as Current Asset
AR will be listed on your balance sheet. It will be under current assets, next to cash, inventory, and other items you expect to turn into money soon.
AR Bloats Risks
When your AR continues to increase and cash is not flowing in, then you have too many unpaid invoices. That can compel you to postpone payment of your bills or even take loans to keep afloat.
Is Accounts Receivable Debit or Credit? (The Straight Answer)
The short answer is this: accounts receivable is a debit. Why? Since in accounting, debits add to asset accounts, and AR is an asset. When you sell on credit, you will record it by debiting AR and crediting Sales Revenue.
When the customer pays you, do the opposite. Debit Cash (or Bank) to show you received money. Then, credit AR to lower the balance.
The Debit/Credit Logic
Debits increase assets (such as AR and Cash) and credits decrease assets.
Credits increase revenue, and debits decrease revenue.
For example:
This table shows a simple example of accounts receivable. It explains how to record a credit sale and how to apply a customer’s payment. Notice that the balance of the debit and credit entries is maintained in every step.
Exceptions Cases
In some cases, AR will have a credit balance. It may occur when a customer pays more than they should, when you make a refund, or when an invoice was posted incorrectly. In this case, you may have to issue a credit memo or refund to bring the balance to zero.
QuickBooks research shows that 56% of small businesses in the U.S. have unpaid invoices. The average amount owed is $17,500. This is why it is so important to get these entries right.
A Brief About the Accounts Receivable Process
The accounts receivable process has several steps. Companies should follow these steps to get paid on time by their customers. These are:
Reference Links of the image: Journey of Accounts Receivable
Invoicing: The initial procedure in the accounts receivable process is to develop and deliver an invoice to the customer. This should be an invoice with the details of the goods or services supplied, the amount due, and the payment terms.
Payment terms: The invoice should include the payment terms. This includes the due date, payment method, and any discounts or penalties for early or late payments.
Follow up on payment: After sending the invoice, check in with the customer to ensure they pay on time. Email, phone calls, or automated reminders can achieve it.
Receipt of payment: Get the payment and record it in the accounts receivable ledger. Then, update the customer account.
Reconciliation: Reconcile accounts receivable by comparing receipts to debts and any differences or past due debts.
Bad debt management: Create a plan to handle cases when customers do not pay their debts. This will help reduce potential losses.
The Accounting Equation & Where the Accounts Receivable Fits In
The basis of double-entry bookkeeping is the accounting equation:
Assets = Liabilities + Equity
It is a basic equation that keeps your books in balance. It is like a see-saw: when one side is altered, the other side is changed to correspond. Every transaction in your business affects two or more accounts. One account is on the left (Assets) and one is on the right (Liabilities or Equity).
Accounts receivable (AR) is in the Assets category. It is money that customers owe you. This money will eventually turn into cash. When you sell on credit, you increase your assets (accounts receivable). You also boost your revenue, which raises your equity.
Here is Where AR Comes in:
At the sale: You credit AR (asset goes up) and debit Sales Revenue (equity goes up through retained earnings).
At payment: You credit Cash (asset goes up) and debit AR (asset goes down). The value of the assets stays the same. However, the form of the asset changes. The money owed is now cash in hand.
When you imagine a basic T-account diagram, AR is in the asset column. A debit increases its balance; a credit decreases it. That is why it is important to know where the AR fits in the equation. This helps you understand what each journal entry is and why it is made.
Accounts Receivable on the Balance Sheet and What Credit Balances Mean
A credit balance in accounts receivable (AR) happens when a customer pays more than they should. For example, if a customer gets an $800 invoice and pays $900 by mistake, they will have $100 with your company. This amount can be refunded or used for future purchases.
In other terms, a credit balance in the accounts receivable implies that the company owes money to the customer. Businesses can handle this in the following ways:
Refund to the Customer: Refund to the customer to give them the excess amount in case they want it or it is their wish.
Future Invoices: Apply the balance of credit to future purchases or invoices with the same customer.
Contact the Customer: Let the customer know their credit balance. Ask if they want a refund or to use it for future orders.
Periodic Review: Regularly check accounts with credit balances. This ensures they are managed correctly and cleared on time.
Adjust Records: You should update your accounting records to match the credit balance. This will help make your financial statements clear and accurate.
How NCRI Can Help You Master Accounts Receivable
You may know that accounts receivable is a debit. You might have a process in place. However, late payments, invoice disputes, and posting errors can still hurt your cash flow. NCRI is not just another software vendor. We are your partner, working alongside you in your receivables workflow.
Here’s how NCRI can directly improve your AR performance:
Complete AR Management: Outsourcing your entire receivables cycle, from invoice to collection.
Expert Dispute Resolution: Quickly resolving billing issues to get payments back on track.
Automated Cash Application: Auto-matching incoming payments to invoices with your ERP.
Strategic DSO Reduction: Using data to identify bottlenecks and reduce Days Sales Outstanding.
Real-Time AR Analytics: Instant dashboards showing your AR health, not just month-end reports.
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