Q:What are the journal entries for account receivable?
A:Accounts receivable is the money owed from clients for purchased goods or services on credit. For example, a sports equipment manufacturer might ship sporting goods to a retail store and allow the store 30 days for payment. As the sports equipment manufacturer waits for the payment, the payment that is expected to be received is an accounts receivable. Accounts receivable is a current asset that appears on the balance sheet because it is money that is expected to be paid to a company within a short period.
Below are some common examples of accounts receivable journal entries:
Sales on Credit and Payment
When money is owed for goods or services provided on credit, the following journal entry applies for the company waiting for the payment. Assume that the transaction amount is $5,000.
The following journal entry is created when the $5,000 payment is received from the client for the goods or services.
Companies often provide sales discounts as an incentive for clients to pay early. For example, assume a company offers a $500 discount if a client pays for their goods within 10 days of the invoice date. Assume the client pays the account in full within 5 days on a $5,000 sale of goods. The journal entry is as follows:
A company can often expect to have a certain number of clients that will fail to make a payment. To account for bad debts, a company will estimate the number of expected bad debts they will have. This is done at the end of the accounting period. For example, assume that a company determines that its bad debts will be $25,000 for the upcoming year. The journal entry to set up the bad debt allowance account will be:
|Bad Debt Expense||25,000|
|Allowance for Doubtful Accounts||25,000|
You will notice above that accounts receivable is not recognized in the above journal entry. This is because the entry represents an estimate. Accounts receivable does not come into play until a specific bad debt is determined to be uncollectable. For example, imagine that a company determines that a $2,000 account is uncollectable. The journal entry that applies is for a $2,000 reduction for the bad debt allowance and a decrease in accounts receivable that will no longer be collected.
|Allowance for Doubtful Accounts||2,000|