When it comes to understanding accounting, the terms “credit” and “debit” often create confusion, especially in the context of accounts receivable management. Keeping the financial records accurate is a significant step in accounts receivable (AR). In filling financial records, understanding the terms ‘credit’ and ‘debit’ proves crucial. However, whether an entry is considered a credit or a debit depends on the perspective and the accounting method being utilized. In this article, we’ll explore what accounts receivable is, its classification as either a credit or a debit, and delve into the process of completing the accounts receivable balance sheet.
What Is Accounts Receivable?
Accounts receivable (AR) is a fundamental concept in accounting. It represents the payments that a business is entitled to receive from its customers for products or services provided on credit. In simpler terms, it’s the money that clients or customers who haven’t paid yet owe to your business.
For example, if a furniture store sells a sofa to a customer who promises to pay in 30 days, the amount owed by the customer becomes an accounts receivable on the store’s books until they receive the payment.
Is Accounts Receivable a Credit or a Debit?
Accounts receivable is neither a credit nor a debit in itself, rather, it’s an asset account. In double-entry accounting, assets like AR are recorded on the balance sheet, which is divided into two sides: debit and credit. When a customer owes you money (accounts receivable), it is considered an asset, and you record it as a debit.
In accounting, the fundamental principle is that every debit must have an equal and opposite credit. So, while accounts receivable itself is recorded as a debit on your balance sheet, the corresponding entry is made in another account – typically, the revenue or sales account – as a credit. This reflects that you have earned revenue but have not yet received the cash.
In summary, AR is recorded as a debit on your balance sheet because it represents money owed to you. The corresponding credit is recorded in a revenue or sales account, reflecting the income earned. It is important to ensure that the debit and credit always balance each other.
The Process of Filling the Accounts Receivable Balance Sheet
Now that we understand that accounts receivable is a debit on the balance sheet, let’s explore the process of filling the accounts receivable balance sheet:
Initial Recording
When you make a sale on credit, you record the transaction in your accounting system. You debit accounts receivable to reflect the money owed to you and credit the appropriate revenue or sales account to recognize the income.
Monitoring
As time passes, you keep track of the aging of your AR. This means categorizing outstanding invoices by how long they’ve been overdue (e.g., 30 days, 60 days, 90 days).
Collection Efforts
If customers haven’t paid by the agreed-upon due date, you start collection efforts. This may involve sending reminders, contacting customers, or even offering payment plans to encourage timely payment.
Recording Payments
When customers make payments, you record them as deposits or cash receipts. You credit accounts receivable to decrease the amount owed, and you debit your cash account to increase the cash on hand.
Reporting
Your company’s balance sheet includes reporting of accounts receivable balances, which are part of its financial statements. This provides a snapshot of your outstanding receivables at a given point in time.
Conclusion
Businesses can benefit greatly from accounts receivable management because it is essential to making sure that they receive payments from their clients on time. This process not only speeds up payment processing but also improves collection rates by employing efficient strategies and streamlined procedures.
If you are a business owner looking for help with AR, you should seek the expertise of a reputable collections agency near you. One such company that can assist you in managing your accounts receivable efficiently is First Credit Services.
First Credit Services, is a BPO company that specializes in accounts receivable management. The BPO services also include debt and credit collection services. FCS assists in accounts receivable with early intervention, failed payment recovery, and bookkeeping services. We have over 25 years of compliant collections. Trust your AR process with us today!
