How to Record Account Receivable (AR)
Account Receivable (Trade receivables) arise when a business makes sales or provides a service on credit.
Recording Account Receivable as follows:
Credit Sale
If company made sale on credit, the entries are as follow.
Dr. AR…………………xx
Cr. Sale…………………..xx
(Merchandising or manufacturing company normally use word “Sale”)
Dr. AR……………….xx
Cr. Service Revenue…….xx
(Service Company normally uses word “Service Revenue”)
Cash collection from Credit Sale
Before company made sale on credit, but now company collected credit or cash from customers.
Dr. Cash……………xx
Cr. AR……………………xx
Sale Return from Credit Sale
In some cases, customers may return goods or products back to suppliers because of quality, damage, wrong goods/product etc. The following entry is assumed sale return from credit sale.
Dr. Sale return……xx
Cr. AR…………………xx
Note: If company made cash sale before, so sale return will be recorded as follows.
Dr. Sale return…..xx
Cr. Cash…………….xx
Customers Fail to Pay
This might happen because specific customers have been declared bankrupt or has disappeared and cannot be traced. If we know specific customers ( e.g Customer A, Customer B, etc) fail to pay our credit sales, so the entries are as follows.
Dr. Irrecoverable debts….xx
Cr. AR, Customer A…………xx
But later Company received a payment from bad debt, Customer A
Dr. Cash…………………..xx
Cr. Irrecoverable debts….xx
Making an Allowance for Receivables
Assume that company has 1,000 customers as credit sales, and we know Customer A (above) fail to pay, so it remains 999 customers that company does not know how many customers more fail to pay. In this case, company will make allowance for doubtful account receivable.
If company just started business for this year (2017), so additional irrecoverable debt is estimated based on judgment or similar business. It is first estimation.
Dr. Irrecoverable debts….xx
Cr. Allowance for receivables…xx
If company was not first year of operation (e.g. start business year 2017, but this year is 2018), so additional irrecoverable debt is increase in allowance for receivable.
Dr. Irrecoverable debts….xx
Cr. Allowance for receivables…xx
Irrecoverable debts = Ending allowance for receivables – beginning allowance for receivables
Note: if it is decrease in allowance for receivable, the following entry is as follows.
Dr. Allowance for receivables…xx
Cr. Irrecoverable debts………….xx
Note: Irrecoverable debts= bad debts
Income Statement
Irrecoverable debts are expenses.
Irrecoverable debts = Irrecoverable debts (written off ) + Irrecoverable debts (Allowance for receivables)
Balance sheet
Please note that allowance for receivable is contra account of account receivable.
Remaining AR………………………..xx
Less Allowance for receivables..(xx)
AR…………………………………………xx
Example for ABC Company ( Year 2017 )
Assume ABC Company is registered as company in year 2017, and company made credit sale of $100,000 to 1,000 Customers (Customer 1, Customer 2…Customer 1000) and cash sales (Customer A, Customer B…Customer Z) are $70,000 as of October 2017.
Record as of October 2017
Dr. AR…………………100,000
Dr. Cash……………….70, 000
Cr. Sale……………………..170,000
(Credit sale of $100,000 and cash sale of $70,000)
Cash collection from Credit Sale
Assume that 10 November 2017, Customer 1 paid $10,000 to ABC Company.
Dr. Cash……………10,000
Cr. AR……………………10,000
Sale Return from Credit Sale and cash sale
Assume that 15 November 2017, Customer 2 returned goods $20,000 to ABC Company because of quality problem. Also 17 November 2017 Customer A returned goods $30,000 to ABC Company because of damage during transportation.
15 November 2017
Dr. Sale return……20,000
Cr. AR…………………20,000
(Returned from credit sale)
17 November 2017
Dr. Sale return…..30,000
Cr. Cash…………….30,000
(Returned from cash sale)
Customers Fail to Pay
Assume that 29 November Customer 1 and Customer 10 declared bankrupt and has disappeared, their credit sales are $10,000 and $20,000 respectively.
Dr. Irrecoverable debts….30,000
Cr. AR, Customer 1,10…………30,000
Assume that 15 December 2017, Customer 1 negotiated with ABC Company and agreed to pay $5,000.
Dr. Cash…………………..5,000
Cr. Irrecoverable debts……5,000
( bad debt is only $5,000 ($10,000-$5,000) for Customer 1)
Making an Allowance for Receivables
For 31 December 2017, Company will close financial statements. After Customer 1 and 10 declared bankrupt, company suspected a few customers among remaining 998 customers (1,000-2) may be bankrupt or disappeared. According to the same industry and judgment, it is estimated that 3% will be bankrupt.
Answer
Remaining AR = $100,000 – $10,000-$20,000-$30,000=$40,000
Additional irrecoverable debt = $40,000 x 3%=$1,200.
Dr. Irrecoverable debts….1,200
Cr. Allowance for receivables…1,200
(it is first year of company operation)
Income Statement
Irrecoverable debts = 5,000 + 1,200=$6,200
Balance sheet
Remaining AR………………………40,000
Less Allowance for receivables.(1,200)
AR……………………………………….38,800
Example for ABC Company ( 2018 continued from Year 2017)
Now ABC Company started business second year (2018).
Cash collection from Credit Sale
Year 2018 assume that 10 February , Customer 15 paid $100 to ABC Company.
10 February 2018
Dr. Cash………………100
Cr. AR, Customer 15…100
Making an Allowance for Receivables
Year 2017 company estimated additional irrecoverable debt is 3%, but 31 December 2018 is estimated 5% for additional irrecoverable debt because of wrong estimation.
Answer
Remaining AR = 40,000-100=$39,900
Ending allowance for receivable = $39,900 x 5%=$1,995
Beginning allowance for receivable = $1,200
Increase in allowance for receivable=1,995-1,200 =$795
Dr. Irrecoverable debts….795
Cr. Allowance for receivables…795
Income Statement
Irrecoverable debts = 795
Balance sheet
Remaining AR………………………39,900
Less Allowance for receivables..( 795)
AR……………………………………….39,105