What is account receivable?
In accounting ideology, account represents a ledger to post buy or sell activities, whereas receivable represents a promise to pay in the future either on a paper or verbally. Both are same at some extent, because if a customer defaults or file a bankruptcy, supplier will suffer losses only rather than any recovery.
Services and goods which are provided on a promise rather than cash is recorded as receivable. It is a perk for a customer to use it now and pay it later to exercise business and increase sales.
Providing or supplying on a promise regardless of any type of collateral can be converted into default as well. So, it is vital to scale the credibility of a customer for a protection or supply only which you can afford to lose same as you invest in stock market whatever you can afford to lose. Bad debts also become a cause of inflation if constant defaults are filed.
Accounts receivable is part of the balance sheet, and it is recorded as current assets because it is generally received within a year or otherwise it is reported as a bad debt or lost in income.
Accounting vs Equilibrium
Recording a business activity is the state of equilibrium. Likewise, accounting is based on the equilibrium ideology. In accounting debit and credit must be matched same as demand and supply the two forces interact with each other to populate business and keep the economy balanced.
We have divided accounts receivable into three phases to understand the flow of recording business activities into receivable and the other relevant ledgers.
Phase One to Record Accounts Receivable:
- A customer invoice is created when an order is received by the customer.
- Accounts Receivable is debited in balance sheet.
- Whereas Income is credited in the income statement.
- Both receivables and revenue are increased simultaneously in the balance sheet and in the income statement to balance various accounting ledgers.
Phase Two to Record Payment Received from a client:
- A cash received voucher (C.R.V) is created when the payment is received against a due invoice.
- Bank is debited in balance sheet.
- Whereas accounts receivable is credited on the balance sheet.
- Additionally, the bank or the payment processing charges are debited also if the payment is made by a third party’s portal such as MasterCard, Visa card or PayPal.
Phase Three to reconcile client account reconciliation
It is vital to reconcile each client account to make sure there is no overdue amount after the due date to avoid the bad debts or loss in income.
Example to explain accounts receivable recording in ledgers:
Question? Roza has used InfoTaxSquare.com services for 30 days
Credit. Customer Invoice shall be created as follows:
Debit: Accounts Receivable $100.00
Credit: Sale $100.00
Cash received voucher shall be created if Roza makes payment in 30 days:
Debit: Bank/Cash in Hand $100.00
Credit: Accounts Receivable $100.00
We shall pass a journal voucher if Roza defaults:
Debit: Sale $100.00
Credit: Accounts Receivable $100.00
