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Accounts receivable

When an individual or organization owes debts to its suppliers for goods delivered or services provided on a credit basis, these debts are known as accounts receivable.  Receivables arise from the billing of the customers by issuing invoices to them but have yet to collect payments from the customers.

The customers are allowed a payment term of usually 30 days which means the amount on the invoice is due for payment 30 days from the date of the invoice. They are however welcome to pay before the due date. The payment term can be for any period up to 60 days as mutually agreed.

It is assumed that not all debts will be cleared and a provision for bad debt is therefore made to subtract from the total accounts receivable. This is done by preparing an ageing report on the receivables to determine potential bad debts. The providing for bad debt is to avoid overstating the value of debtors on the financial statements.

The difficulty in collecting debts has caused some businesses to make use of collection agencies which seek to recover the debts on their behalf or through factoring by which they sell their debts to an external party at a discount.

The total of the accounts receivables for a given accounting period is arrived at by using the accrual method. Receivables must be reported in the period in which they occur. These added to the receivables brought forward from the previous period less the payments received for the receivables gives the total closing balance of the accounts receivable account for that period. This closing figure must equal the total owed by the list of debtors at the end of the period.

Most if not all account receivables are due within a year and are therefore classified as current assets on a firm’s balance sheet. The accounts receivable account is always a debit account.

A worked example follows to show how the accounts receivable account is posted.


Sales Journal

Date
Accounts debited
Invoice No.
Folio
Amount




$
Mar 06
Brown & Co
007

1,240
  "  12
Black & Son
008

3,160
  "  19White & Co
009

780
  "  27Black & Son
010

2,820





"  30
Total


8,000






Sales Ledger

Brown & Co Account

Date

Folio
Dr
Cr
Balance



$
$
$
Mar 06 Sales

1,240

1,240







Black & Son Account

Date

Folio
Dr
Cr
Balance



$
$
$
Mar 01 Balance b/f



1,340
Mar 12 Sales

3,160

4,500
Mar 27Sales

2,820

7,320







White & Co Account

Date

Folio
Dr
Cr
Balance



$
$
$
Mar 01
Balance b/f



560
Mar 19
Sales

780

1,340







General Ledger

Accounts Receivable Account

Date

Folio
Dr
Cr
Balance



$
$
$
Mar 01Balance b/f



1,900
Mar 31
As per Sales Journal

8,000

*9,900







Sales Account

Date

Folio
Dr
Cr
Balance



$
$
$
Mar 31
As per Sales Journal


8,000
8,000







* The Accounts Receivable account closing balance of $9,900 is made up of:


$
Brown & Co
1,240
Black & Son
7,320
White & Co
1,340



9,900



Discounts allowed and returns inwards

When discounts are allowed to customers or customers return goods due to some reasons, the Discounts Allowed account and the Returns Inwards account are debited, while the corresponding entries are recorded on the credit side of the Accounts Receivable account. All these accounts are found in the general ledger.

Example: Black & Son is allowed discounts of $300 and White & Co returns goods worth $60:

General journal entries

Date
Accounts
Folio
Debit
Credit



$
$
Mar 31
Discounts allowed

300


Accounts receivable


300

(Discounts allowed to Black & Son)








Mar 31
Returns inwards

60


Accounts receivable


60

(Damaged goods returned by White & Co)









Last Updated (Saturday, 23 October 2010 02:19)