Understanding accounts receivable (AR) is crucial for your company's finances. Efficiently managing your AR can help you manage your cash flow and ensure you don't lose out on cash.
Fully understanding AR requires knowing its recording in accounting books and the workings of double-entry accounting systems. In double-entry accounting, each transaction is recorded as a debit and a credit, so keep reading to find out if AR is a debit or credit account and how to record it.
Key takeaways
Accounts Receivable (AR) is money owed to your business for provided goods or services not yet paid for.
Simply put, AR is money customers owe.
Accounts receivable show up on your balance sheet as a current asset. Your AR boosts working capital, a short-term asset ideally collected within days to a year.
Your AR account records money owed to you from other parties.
Accounts payable, on the other hand, is the opposite of AR: AP represents the money your company owes to other parties.
Accounts receivable, as an asset account, is a debit account.
That's because debits increase asset accounts.
In double-entry bookkeeping, every transaction includes a debit and a credit. This accounting method is based on an understanding that every transaction has an equal and opposite effect in at least two accounts.
Debits and credits are used to balance the accounting equation: Liabilities = Assets + Equity.
Credits record an amount added or deposited in an account balance. A recorded credit will decrease an asset account or increase a liability account.
Debits record an amount owed or subtracted from an account balance. Debit entries will increase asset accounts and decrease liability and equity accounts.
Further reading: Is accounts payable an asset or liability?
Accounts receivable is increased by a debit entry. On the other hand, credit decreases accounts receivable.
A bill receivable is a formal document that shows your customer agrees to pay a certain amount during a specified period. Bills receivable can be current assets or non-current assets, depending on the length of the payment terms.
Bill receivable is an asset account, thus a debit account.
The accounting equation is: Assets = Liabilities + Equity. Debit and credit entries balance the accounting equation
A debit entry increases the amount in your AR account. When goods/services are given, a debit record will be used to increase the accounts receivable account.
A credit entry decreases the amount in your AR account. When a payment is made, a credit entry will decrease the amount in your accounts receivable account.
To understand applying debits and credits to AR, consider these examples:
Increasing AR after receiving an order
Let's say you've received a product order for $300. In the general ledger, you would have to make a journal entry to reflect an increase in AR.
To increase the accounts receivable balance, you would debit the account with $300. Then, following the rules of double-entry accounting, you would have to record the credit side as well. In this case, you would credit the revenue account, as a credit entry will increase the revenue account.
Note: A debit will decrease an expense account, and a credit will increase a revenue account.
| Account | Debit | Credit |
| Accounts receivable — Paper supplier | $300 | - |
| Revenue | - | $300 |
Then, once a payment is made
Once payment is received you need to update your journals. In this example, you would credit accounts receivable to decrease the amount by $300, and for the debit side, you would debit the cash account to increase it by $300 to reflect the payment.
| Account | Debit | Credit |
| Cash | $300 | - |
| Accounts receivable — Paper supplier | - | $300 |
Use debit to increase your AR account, and use credit to decrease your AR account.
Accounts receivable management is crucial to maintaining a healthy cash flow. Managing accounts receivable is vital to ensure you don't lose out on cash. According to Atradius, on average, businesses in the Americas lose 51.9% of the value of their receivables that are not paid within 90 days of the due date.
Wondering ways you can improve your AR process and management? Consider the following strategies.
Implementing automation can help speed up and add efficiency to your accounts receivable process.
AR automation software, like Plooto, rids your process of tedious, manual processes, cutting down the time needed to process invoices and receive payments.
Consider implementing automation into your AR process to simplify your receivables and save you precious time.
One way to encourage prompt payment from customers is to offer early payment discounts. Faster payments means you get more control over your cash flow.
Keeping track of key accounts receivable metrics gives insight into the efficiency of your AR process. Consider the following metrics:
Having access to these metrics can help you evaluate policies and procedures you put into effect. This approach empowers your decision-making with data.
Ensure that you have clear and solid credit terms. This can save you time with back and forth calls with confused customers.
A credit application is important for a few reasons:
Be careful with who you extend credit to, as receiving cash for your goods/services is vital for your business operations.
Managing your cash flow is vital for your business health, and can help guide your management of your accounts receivable.
Of course, efficient AR management is key to getting cash into your business, but considering the cash needs of you business can help you understand when you need cash, and when you should try to incentivize early payment.