Account receivable
An account receivable is an amount that is owed to an entity, usually by one of its customers as a result of a recent sale or the ordinary extension of credit. A company that has sold and shipped goods to a customer, and sent an invoice, has an account receivable even if the customer has not actually paid yet.
As shown in the examples below, the income statement, balance sheet, and statement of changes in financial position will reflect the total Accounts receivable figure for the accounting period, but this total will be adjusted downward to allow for bad debt expense.
Accounts Receivable: Balance Sheet Example
Accounts Receivable: Bad Debt and Allowance for Doubtful Accounts
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Accounts Receivable: Balance Sheet Example
At the end of an accounting period, when financial accounting reports are prepared and published, the sum of receivable accounts appears as Accounts receivable on the Asset side of the balance sheet under Current assets as shown in this example.
Grande Corporation Assets Liabilities Owners Equity |
(See the encyclopedia entry for balance sheet for a more complete version of the above sheet).
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Accounts Receivable: Bad Debt and Allowance for Doubtful Accounts
Tne Accounts receivable balance at period end will enter the income statement, balance sheet, and statement of changes in financial position, but in different ways. For each of these statements, the Accounts receivable contribution will be adjusted to reflect any cases where the company has had to write off bad debt.
When customer payment becomes overdue on an account receivable, the selling company will watch the overdue account for another 30 days, or 60 days, or some other time period, during which it continues attempting to collect payment. If payment is still not forthcoming, or if the seller has other reason to believe it will never be paid (e.g., the customer has gone out of business or declared bankruptcy), the seller may choose to "write off" the debt, as shown below. To do so, the bookkeeper will make two entries in the journal that might look like this:
Grande Corporation Date Account Debit Credit |
Double entry bookkeeping requires two entries for every transaction, one a debit and the other an equal, offsetting credit. Here, the account Bad debt expense is a normal Expense category account whose balance increases with a debit transaction. The other account, Allowance for doubtful accounts is an asset category account, but it is also a contra asset account. Thus, this account's value is increased by a credit (the reverse of what a credit does to a normal asset account).
Writing off the debt this way, incidentally, does not relieve the debtor of the obligagtion to pay. The seller undertakes the write off in the interest of accounting accuracy, but the customer is still liable for the debt. The seller retains every right to pursue payment by other legal means, such s engaging a collection service, or filing a law suit.
With the write off accomplished this way, the Accounts receivable impact on the financial statements is as follows:
- Income statement and Statement of Changes in Financial Position: The Accounts receivable figure is part of the total net Sales Revenues. Under accrual accounting, the company claims sales earned during the period, including those that are still "payable"
Both of these statements, however, may include a line item for Bad debt expense. On the income statement this normally appears along with other expenses under Operating expenses, below the Gross profit line. On the Statement of changes in financial position, Bad debt expense will be listed as a non cash expense. In both cases, the net result is to adjust the Sales revenues contribution downward. - Balance sheet: On the balance sheet (as shown in the example), the asset category account Accounts receivable has its impact adjusted downward by the contra asset account Allowance for doubtful accounts.
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