Exploring accounting basic, one of the constituent topics is accounts receivable accounting. This topic is closely related to the accrual basis principle, since receivables represent current assets accounted for in the books of business caused by sale of goods or delivery of services. This article expands more on the concept of receivables and their accounting aspects.
Concept
As already mentioned, Accounts Receivable are attributed to current assets category and are accounted for as a result of goods' sale or provision of services. Receivables represent a right of business to claim payment from customers for the sales performed. So this is a debt from customers to the seller which has to be repaid back within the period of time which is agreed by the parties, i.e. seller and customer.
Receivables are accounted for when business sells goods or provides services, however cash from customer will be collected later on. This type of asset is created only when accrual basis accounting principle is applied, which means that sales revenue is recognized despite the fact that cash was not received yet. The following accounting entry is made:
Practical Example
Below you can find simple practical example how to account for receivables. Let us assume that on March 15 company ABC sold goods to its customer company DCF for $5,600. Both parties agreed that DCF will pay for these goods within 30 days from the sale, i.e. the final payment date is April 14. On March 31 customer paid part of the debt for the goods, i.e. $1,300. The remaining part was paid on April 5.
1. On March 15 the following accounting entry is made in the books of the seller:
3. On April 5 the following entry is made in the books of seller:
Concept
As already mentioned, Accounts Receivable are attributed to current assets category and are accounted for as a result of goods' sale or provision of services. Receivables represent a right of business to claim payment from customers for the sales performed. So this is a debt from customers to the seller which has to be repaid back within the period of time which is agreed by the parties, i.e. seller and customer.
Receivables are accounted for when business sells goods or provides services, however cash from customer will be collected later on. This type of asset is created only when accrual basis accounting principle is applied, which means that sales revenue is recognized despite the fact that cash was not received yet. The following accounting entry is made:
When cash from customer is collected, the following accounting entry is made:
D Accounts Receivable (Current Asset category) $1000C Sales Revenue $1000
Since receivables are attributed to the current asset category, their balance is separately presented on the Balance Sheet.
D Cash $1000C Accounts Receivable $1000
Practical Example
Below you can find simple practical example how to account for receivables. Let us assume that on March 15 company ABC sold goods to its customer company DCF for $5,600. Both parties agreed that DCF will pay for these goods within 30 days from the sale, i.e. the final payment date is April 14. On March 31 customer paid part of the debt for the goods, i.e. $1,300. The remaining part was paid on April 5.
1. On March 15 the following accounting entry is made in the books of the seller:
2. On March 31 the following entry is made in the books of seller:
D Accounts Receivable $5,600C Sales Revenue $5,600
Remaining debt from customer DCF is $5,600-$1,300=$4,300
D Cash $1,300C Accounts Receivable $1,300
3. On April 5 the following entry is made in the books of seller:
Remaining debt from customer DCF is $0.
D Cash $4,300C Accounts Receivable $4,300
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