Being able to read financial statements like the balance sheet or income statement is a great first step.
But if you really want to dig into your company’s financials, you’ll want to look beyond the three main reports and dig into your journal entries.
One of the most common entries you’ll find in double-entry accounting is the accounts receivable journal entry.
In this guide, we’ll help you understand what this entry is all about.
We’ll discuss what accounts receivable journal entries are and what they’re for, their importance in accounting, and how they impact financial statements.
Definition and purpose of accounts receivable journal entries
Accounts receivable journal entries are accounting records that document financial transactions related to credit sales and the subsequent receipt of payment from a customer.
They capture the amount owed by customers for goods and services provided on credit (not paid for upfront) and help you track the inflow of cash when payments are made.
When a sale is made on credit, the journal entry is a debit to the accounts receivable account. When a customer payment is received for a credit sale, it is entered as a credit journal entry.
Why are accounts receivable journal entries important?
Accounts receivable journal entries have a number of purposes, including:
- Ensuring that all sales made on credit are recorded accurately
- Improving revenue tracking and reflecting the true financial performance of the business
- Maintaining accuracy of receivables to manage expected cash flow
- Providing a record of amounts owed by each customer to facilitate follow-ups and improve customer accountability
- Contributing to the preparation of financial statements, showing accounts receivable as an asset on the balance sheet
- Ensuring adherence to accounting principles and regulations such as GAAP.
- Facilitating strong cash flow management by allowing businesses to forecast incoming cash
- Ensuring that financial statements accurately represent the company’s assets
- Allowing business leaders to make more informed decisions regarding sales strategies, customer relationships, and credit policies
- Minimizing errors through consistent and accurate entries
Examples of accounts receivable journal entries
Here are a few common examples of when you might make an accounts receivable journal entry.
Recording a credit sale
When recording a sale made on credit, the two entries are:
- Debit: Accounts Receivable (Customer Name)
- Credit: Sales Revenue
Recording a payment from a customer
When recording a payment made by a customer for a credit sale, the two entries are:
- Debit: Cash/Bank
- Credit: Accounts Receivable (Customer Name)
Recording a bad debt write-off
When recording a bad debt write-off, the two entries are:
- Debit: Bad Debt Expense
- Credit: Accounts Receivable (Customer Name)
How accounts receivable journal entries impact financial statements
Accounts receivable journal entries play a crucial role in financial reporting. They directly influence the three primary financial statements.
Here’s how.
1. Balance sheet
Accounts receivable is recorded as a current asset on the balance sheet. It represents money owed to the company by its customers for sales on credit.
Any increase in accounts receivable (a debit journal entry) increases this current asset.
Investors and business leaders to understand the company’s liquidity situation. A high accounts receivable balance can suggest strong sales but difficulties collecting payments, indicating potential cash flow issues.
2. Income statement
When a credit sale occurs, the accounts receivable journal entries have a direct impact on revenue recognition.
The corresponding entry increases sales revenue, a core component of the income statement, contributing to the company’s total income.
If a company’s customers fail to pay. the accounts receivable amount may be written off as a bad debt expense. This expense is recorded on the income statement as well, this time reducing net income.
3. Cash flow statement
Accounts receivable journal entries don’t directly impact cash flow, but the two are connected when customers make payments.
Collections from customers reduce the accounts receivable balance and increase cash flow from operating activities.
How to create an accounts receivable journal entry: A step-by-step process
Here’s a quick guide on how to create an accounts receivable journal entry to ensure your own financial records are accurate and up-to-date.
1. Identify the transaction
Your first step is to determine the nature of the transaction. You have three options here:
- A new sale on credit
- A payment received for a previous sale
- An owing amount written off as a bad debt
Gather the appropriate documentation for the transaction, such as a sales invoice or payment receipt.
2. Determine the accounts affected
The accounts to be debited or credited depend on the nature of the transaction.
- For a credit sale: accounts receivable and sales revenue
- For a payment received: cash and accounts receivable
- For a bad debt: bad debts and accounts receivable
3. Calculate the amount
Ensure the correct amount is recorded, including any taxes, discounts, or additional charges to be considered.
4. Record the entry
In your accounting journal, log the transaction and apply the double-entry system by debiting one account and crediting another.
- For a credit sale:some text
- Accounts receivable (Asset): Increases, as the business is owed money.
- Sales revenue (Revenue): Increases, as income is earned.
- For a payment received:some text
- Cash (Asset): Increases, as money is received.
- Accounts receivable: Decreases, as the receivable is settled.
- For a bad debt:some text
- Bad debts (expense): Increases, as the amount is transferred to a bad debt
- Accounts receivable: Decreases, as the receivable is written off.
5. Post the entry to the general ledger
Transfer the journal entry to the respective accounts in the general ledger to update account balances.
6. Verify the entry
Double-check the amounts, accounts, and details to ensure that the entry aligns with your supporting documents.
Types of transactions that require accounts receivable journal entries
The list of transaction types that will require an accounts receivable journal entry is quite brief:
- Credit sales
- Payments received from customers
- Refunds or adjustments
- Bad debt write-offs
- Interest charges on overdue accounts
Common mistakes to avoid when creating AR journal entries
Creating an accounts receivable journal entry may be a fairly simple task, but that doesn’t mean it's difficult to make mistakes that can drastically impact the accuracy of your financial statements.
Here are some of the most important mistakes to pay attention to and ideally avoid:
- Misclassifying transactions, such as debiting revenue instead of accounts receivable
- Recording incorrect amounts, such as forgetting to include taxes
- Ignoring timing differences, such as failing to account for the proper accounting period and recognizing revenue in the wrong month
- Omitting adjustments, such as not recording discounts
- Not performing sanity checks, such as skipping reconciliations
- Failing to recognize payment terms, such as not properly recording late payment penalties
- Overlooking recoveries, such as failing to record payments from previously written-off accounts
- Neglecting to monitor accounts receivable age, such as not using an accounts receivable aging schedule to stay on top of outstanding payments
- Lack of supporting documentation, such as failing to attach invoices or payment receipts
- Using manual entries for recurring transactions, such as monthly sales made on credit to the same customer
Best practices for managing AR journal entries
Here’s how to make sure you’re properly managing accounts receivable journal entries.
Reconcile accounts receivable journal entries with customer invoices
Accuracy is the number one priority here.
Ensure all AR journal entries are properly documented by implementing a double-check procedure where the entry is confirmed against a document like a customer invoice before sending it to the general ledger.
Establish clear policies and procedures
Improve accuracy and consistency by implementing standardized policies for recording accounts receivable entries, including guidelines for handling late payments, credit notes, and write-offs.
Make sure these procedures are easily accessible in a shared document, and that you regularly review and update documentation as processes and policies change.
Use automation tools
Many AR processes, from recording payments to generating invoices to matching entries can be automated.
Implementing accounts receivable automation can help reduce errors and improve efficiency.
Review and approve entries
At a minimum, implement a policy of conducting periodic reviews of AR journal entries, such as a quarterly audit.
If mistakes are being made regularly, consider including an approval workflow to ensure that the entries meet internal controls and compliance standards.
Monitor aging reports
The accounts receivable aging report helps you to track overdue payments and prioritize collection efforts.
It makes it easier for you to keep on top of pending or late customer payments, improving cash flow and reducing the risk of AR turning into a bad debt.
Make it a practice to monitor the AR aging report regularly, such as at the beginning of each week.
Conduct monthly closing procedures
Part of your monthly closing procedure should be to reconcile your accounts receivable accounts.
This involves verifying balances, resolving any discrepancies, and ensuring all entries are posted to the general ledger to maintain clean and up-to-date financial records.
Tips for improving efficiency and reducing errors
Accounts receivable journal entries are an incredibly common form of journal entry. Every time you make a sale on credit, and every time a customer with an outstanding account makes a payment, you’ll need to create an AR journal entry.
All of those entries can really add up. That’s why the most ambitious finance teams use a financial operations platform like BILL to manage AR and AP payable journal entries, automate reconciliations and matching.
Discover how BILL’s powerful account receivable automation platform can supercharge your AR team.
