Accounting 101 – Accounts Receivable
Small Business Bookkeeping Basic Account Entry Lesson
Sep 28, 2009
Accounts receivable (AR) is an important part of almost every small business. Even cash retail businesses normally accept credit cards, which is considered a receivable. AR is any product or service sale on account where cash (checks are considered cash) is not immediately received, including debit and credit cards.
Even though using bookkeeping software will help with the daily use of accounting functions for a small business, it’s still important to have an understanding of the basic functions of accounting. Before learning how accounts receivable is posted to the journals, it’s important to understand the functions of debits and credits. Understanding how debits and credits work is the first step into grasping the fundamentals of accounting.
Posting Accounts Receivable to the Sales Journal
Since accounts receivable is an asset of the business, posting a debit is an increase and a credit is a decrease. Since a debit increases an asset, if a sale is made to a customer on open credit terms, the AR account is posted with a debit for the total amount that is owed on the invoice or sales receipt.
Generally sales are posted to the sales journal, whether it’s on open account or a cash sale. Using the sales journal as an example, let’s see how a typical AR sale will post. Product XYZ is sold for $100.00, there is sales tax of 5% and a $7.00 dollar freight charge.
Sales Journal Example of Accounts Receivable
Debit
- Accounts Receivables $112.00
Credit
- Sales $100.00
- Freight Expense $7.00
- Sales Tax $5.00
Posting to Individual Customer Accounts Receivable
With most small business accounting software, sales on account are generally posted directly to individual customer accounts. With the traditional manual method of bookkeeping, separate ledgers are kept for each customer. The receivable amounts are transferred to the customer’s ledger from the sales journal. After the amount is transferred a simply check mark is made next to the transaction on the sales journal.
Posting Accounts Receivable – The Receipts Journal
When cash or checks are received for any business transaction they should be posted to the receipts journal. This includes incoming cash or checks for accounts receivable. Recording the transaction for payment against an account is fairly simple. Using the above example the payment against the account would be as follows:
Receipts Journal Example of Accounts Receivables
Debit
- Cash $112.00
Credit
- Accounts Receivable $112.00
Below is an example for the same sale that was made with a credit card. The amount the credit card company charges is 2%. .
Receipts Journal Credit Card Example of AR
Debit
- Cash $109.76
- Credit Card Expense $2.24
Credit
- Accounts Receivable $112.00
Naturally when a payment is made against an account, the customer’s individual receivable ledger must be credited. At the end of the business day the AR journal totals are transferred to the accounts receivable general ledger. The AR general ledger always carries a debit balance and fluctuates daily as sales are made and receipts are posted.
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