When you debit accounts receivable, what do you credit? This is a fundamental question in accounting that many professionals often encounter. Understanding the correct accounting treatment for this transaction is crucial for maintaining accurate financial records and ensuring compliance with accounting standards. In this article, we will delve into the rationale behind crediting accounts receivable and discuss the most common scenarios where this entry is made.
Accounts receivable represent the amounts owed to a business by its customers for goods or services provided on credit. As a result, when a business records an increase in accounts receivable, it needs to debit this asset account. However, to balance the accounting equation, a corresponding credit entry must be made to another account. The credit entry depends on the nature of the transaction and the accounting policies of the business.
One of the most common scenarios where you would credit accounts receivable is when a customer pays their invoice. In this case, the business records the cash received from the customer as an increase in its cash account. The journal entry would look like this:
Debit: Accounts Receivable
Credit: Cash
This entry reflects the decrease in the accounts receivable balance, as the customer has now paid their debt. It also increases the cash balance, which is an asset account.
Another situation where you would credit accounts receivable is when the business decides to write off a portion of the outstanding debt as a bad debt expense. In this case, the business would credit the accounts receivable account to remove the amount from the balance sheet. The journal entry would be:
Debit: Bad Debt Expense
Credit: Accounts Receivable
This entry recognizes the loss incurred due to the uncollectible debt and reduces the accounts receivable balance accordingly.
Sometimes, a business may receive a payment from a customer that is less than the full amount owed. In this case, the business would credit the accounts receivable account for the full amount owed and credit a separate account, such as “Cash Short and Over,” for the difference. The journal entry would be:
Debit: Accounts Receivable
Credit: Cash Short and Over
This entry ensures that the accounts receivable balance is reduced to reflect the actual amount collected, while the “Cash Short and Over” account can be analyzed later to determine the cause of the discrepancy.
In conclusion, when you debit accounts receivable, the corresponding credit entry depends on the specific transaction and the accounting policies of the business. It is essential to understand the rationale behind these entries to maintain accurate financial records and comply with accounting standards. By carefully analyzing the transaction and selecting the appropriate account to credit, businesses can ensure their financial statements accurately reflect their financial position and performance.
