Cash was collected from a customer on account. which accounts are debited and credited

Accounts receivable refers to an account created by an organisation for recording the journal entries related to the credit sales of their goods and services. The organisation handles such credit sales transactions by creating account receivables.

What are accounts receivable journal entries?

Accounts receivables or AR are assets in the seller’s book, as the customer owes the sum of money against such sale of goods and services. On the other hand, the accounts payables account is created in the buyer’s books and is a liability for the seller’s debt. Accounts receivables or trade receivables is maintained debtor wise allowing the business to manage their overdue sales and non-payments. 

Accounts receivables journal entries are crucial as they are the cornerstone of its finances. The journal entry for account receivables is made by debiting the accounts receivable account and crediting the sales account. 

Kinds of journal entries for accounts receivable

There might be several journal entries pertaining to different transactions. The basic and common journal entries relating to accounts receivables are shown below.

1.  Journal entry for credit sales

Account Receivables A/c XXX
To Sales A/c XXX

2.  Journal entry for cash received in full for credit sales

Cash/Bank A/c XXX
To Accounts Receivables A/c XXX

3.  Journal entry for cash received for credit sales after-sales discount

Cash/Bank A/c XXX
Sales Discount A/c XXX
To Account Receivables A/c XXX

4. Journal entry for transferring sales discount to profit/loss account

Profit & Loss A/c XXX
To Sales Discount A/c XXX

5.  Journal entry recording credit sales as a bad debt – i.e. debt that cannot be recovered

Bad Debt A/c XXX
To Account Receivables A/c XXX

6. Journal entry for transferring bad debt to profit/loss account

Profit & Loss A/c XXX
To Bad Debt A/c XXX

Are accounts receivable a debit or credit in books of accounts?

Account receivables show the company’s risk in the form of cash inflow in the near future. It implies that the company will benefit from this risk in the future in the form of cash payments that are in the form of receivables.

Hence, the question of whether accounts receivables debit or credit is straightforward – Accounts receivable must be debited and will be part of the current assets on the asset side of the company’s balance sheet.

If your business collects cash from customers, you need to account for it properly. This process can become complicated if you have individual invoices or bookkeeping entries for a good or service sold to each customer, and if you then make lump-sum deposits of cash to your bank. In accounting, cash accounts don't always refer strictly to paper cash but may reference available money in a bank account.

Accrual vs. Cash Basis Accounting

Keeping track of revenues and expenses is a vital basic function for any business. Per, keeping track of the expected flow of cash ahead of the actual transfer of funds is called accrual basis accounting, as opposed to cash basis accounting, where you only track expenses and revenues as they are realized. Realizing expenses and revenues means that funds have been exchanged.

Companies that sell services on account use accrual basis accounting, while companies that require payment upon services rendered use cash basis accounting.

Terminology and Concepts

According to Bench, when goods or services are rendered ahead of payment, they are considered to have been rendered on credit, and an asset known as an account receivable is created. Accounts receivable is essentially a running total of the amount owed to the business by the companies or persons receiving the goods or services.

A company that receives cash on an account, which is known as a debit, applies that cash to pay down the account receivable. Payments out of an account or services rendered before payment are considered credits.

A company accountant or treasurer keeps track of credits and debits by means of spreadsheets, traditionally called a ledger or journal, and keeps separate accounts for each client as well as a ledger for the company’s cash or balance of assets and expenses.

Journal Entries for Cash Collected

An example of a journal entry for received cash on accounts receivable would be similar to the following. According to Accounting Coach, upon services rendered on credit, an entry is made indicating the creation of an account receivable and its value as a debit to the company receiving the service and a credit to your company’s service revenue.

08/15/2018: Account Receivable (Company A)

Debit of 2,000

08/15/2018: Services Revenue

Credit of 2,000

This indicates your company has lost revenue by rendering the services without payment, and the amount stands as a loss until you collect cash on the account to pay down the account receivable. Upon receiving payment, you record it as a credit on the account receivable and a debit on your revenue, like so:

09/01/2018: Cash (Company A)

Credit of 2,000

09/01/2018: Services Revenue

Debit of 2,000

At this point, the account receivable balance is $0.00, and your company has made a profit of $2,000, less operating costs.

Benefits and Risks of Accounts Receivable

The benefits of using accounts receivable generally outweigh the risks for businesses that can afford to absorb the potential nonpayment by one or more clients. These benefits include being able to assess the accounts as positive assets, in addition to liquid assets. Being able to offer services or goods immediately and receive payment at the customer’s convenience allows your company to garner customers quickly.

The risk of clients not paying their accounts receivable amounts is relatively low, as it is usually a legally binding obligation (provided your contracts and payment terms are structured appropriately). If the client becomes insolvent or is otherwise unable to pay off the debt, you then consider the account as a bad asset. This could be useful if the operating costs for that account were low enough, as you can claim the owed value as a business loss, which lowers your taxes.

When money is collected from customers which account is debited?

Whenever money is collected from a customer previously billed customer, the corresponding amount is credited to accounts receivable account. Moreover, same amount is also debited to the cash account. An increase in asset is recorded as a debit entry and a decrease in asset is recorded as a credit entry.

What does collected cash from a customer on account mean?

What Is On Account? "On account" is an accounting term that denotes partial payment of an amount owed. On account is also used to denote the purchase/sale of goods or services on credit. On account can also be referred to as “on credit.”

What accounts are debited and what accounts are credited?

What are debits and credits? In a nutshell: debits (dr) record all of the money flowing into an account, while credits (cr) record all of the money flowing out of an account.

How do you record received cash from clients on account?

How to Journalize Received Cash From a Client for a Job Completed That Day.
Verify the amount of the unearned revenue. ... .
Record the date of the transaction in the general journal. ... .
Debit the cash account for the amount paid by the client. ... .
Credit the unearned revenue account for the amount paid by the client..