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 others owe you.
- Credit entries decrease an asset account, while debit entries increase asset accounts.
- Accounts receivable is a debit account.
- A debit increases your accounts receivable account.
- A credit decreases your accounts receivable account.
- Improve your accounts receivables with automation, KPI tracking, cash flow management, and clear credit terms.
What are accounts receivable?
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.
What's the difference between accounts receivable and accounts payable?
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.
Are accounts receivable debit or credit?
Accounts receivable, as an asset account, is a debit account.
That's because debits increase asset accounts.
What is the difference between a debit and a credit?
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?
Does a debit or a credit increase accounts receivable?
Accounts receivable is increased by a debit entry. On the other hand, credit decreases accounts receivable.
Is a bill receivable a debit or credit account?
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: accounts receivable on balance sheets
The accounting equation is: Assets = Liabilities + Equity. Debit and credit entries balance the accounting equation
Accounts receivable as a debit on balance sheets
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.
Accounts receivable as a credit on balance sheets
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.
How to apply a debit or credit to accounts receivable — an example
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 |
When do you use a debit or credit for accounts receivable?
Use debit to increase your AR account, and use credit to decrease your AR account.
Why account receivable management is so critical
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.
Automating your AR management
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.
Establish early payment discounts
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.
KPI tracking
Keeping track of key accounts receivable metrics gives insight into the efficiency of your AR process. Consider the following metrics:
- Days sales outstanding (DSO): This measures the average amount of time it takes for payment collection. Ideally, you want your DSO to be below 30 days.
- AR turnover ratio: This ratio measures how many times over a specific period you collect your AR. Try and maintain a ratio as high as possible.
- Average days delinquent (ADD): This measures the average days customers are late on payments. You want to keep this number as low as possible.
- Collection effectiveness index (CEI): CEI measures the percent of accounts you collect revenue on. Aim for as close to 100 as possible, showing you're collecting full payments from all customers.
Having access to these metrics can help you evaluate policies and procedures you put into effect. This approach empowers your decision-making with data.
Credit terms
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:
- Checks the creditworthiness of possible customers.
- Outlines payment terms and obligations.
- Notes interest rate and credit limits.
- It's a legal requirement when entering into an agreement.
Be careful with who you extend credit to, as receiving cash for your goods/services is vital for your business operations.
Keeping on top of your cash flow
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.
