What is Accounts Receivable? Debit, Credit, and Differences

In accounting, the money that your clients owe you for products or services that you have rendered on credit is known as accounts receivable. This sum represents your right to get paid soon and is shown on your balance sheet as a current asset.

In 2020, 88% of customers expected businesses to improve their digital initiatives, indicating a demand for more efficient and accessible AR processes. Accounts receivable are debited, and sales revenue is credited when a sale is made on credit. Both your assets and revenue are increased by this entry. For instance, you would credit sales revenue with $1000 and debit accounts receivable with $1000 if you sold $1000 worth of goods on credit.

A healthy cash flow depends on effective accounts receivable management.

Keeping track of your company’s money and making sure customers pay on time is very important. To do this, you need to understand how debits and credits work in accounts receivable.

Now that we know what accounts receivable is and why it matters, let’s take a closer look at how it’s recorded. In the next section, we’ll see how businesses keep track of sales and payments and learn the difference between debits and credits.

What is Accounts Receivable?

Your clients’ money owed to you for goods or services rendered on credit is known as accounts receivable (AR). This sum is included in your accounts receivable when you deliver a good or service and send out an invoice with terms for payment. Since AR is expected to be converted to cash quickly—typically within a year—it shows up on your balance sheet as a current asset.

What Are Credits and Debits?

Debits and credits are methods used in accounting to document modifications to a company’s financial status. We use debits and credits to record every transaction that takes place in a business, such as a sale or payment.

• Debit: You are increasing the amount of money in an account when you debit it.
• Credit: When you credit an account, you are eliminating funds from it.

What Does This Have to Do with Receivables?

When a company offers a product on credit, the buyer will have to pay later. As a result, the company has accounts receivable, which indicates that it anticipates receiving payment in the future.

Accounts receivable are debited when a company sells products or services on credit. In other words, the balance of accounts receivable is increased by the amount owed by the customer.

As an illustration, a store will debit its accounts receivable by $100 if it sells a customer shoes worth $100 on credit. This indicates a $100 debt owed by the customer to the store.

Credit to Sales Revenue

The store also credits its sales revenue account at the same time. This indicates that, even though they haven’t received the money yet, the store has made $100 in sales.

The company will update its accounts once the customer has finally made payment. To indicate that the funds are now in the bank, the company will debit the cash account. To demonstrate that the client has made payment and is no longer in debt, the company will credit the accounts receivable.

How do Debit and Credit Differ in Accounts Receivable?

• Increase in Accounts Receivable: When funds are due to the company (eg. when an item is sold on credit).
• Reduction in Accounts Receivable: When the customer pays, the amount they owe is reduced, which is known as a credit in accounts receivable.

You can keep track of the money they’ve received and the money they’re owed by understanding these terms. It guarantees they are aware of the precise amount they have collected and the amount that customers owe.

Significance in Accrual Basis Accounting

Accrual basis accounting is a way of keeping track of the money that a business earns and spends. Instead of recording money only when it is physically received or paid, it records money when it is earned or owed. In accrual-based accounting, a business writes down its earnings when it provides a product or service, even if the customer hasn’t paid yet.

This method gives you a more realistic view of your financial performance over a given time frame. Even though you haven’t received the money yet, you still count it as money earned by writing it down in accounts receivable.

Role in Impacting Business Cash Flow and Financial Stability

Managing the money that customers owe you (accounts receivable) is important to keep your business running smoothly. If customers take too long to pay, it can make it harder for you to cover daily expenses or grow your business. To get paid faster, you can use smart strategies like sending invoices on time, reminding customers often, and offering different ways to pay.

For example, automating invoicing and payment reminders with a platform like Peakflo can improve cash flow and streamline your collections process.

Keeping track of the money people owe you and the money you receive will help your business stay strong and grow in the future.

Now, let’s get to know the components of journal entries and accounting principles to learn their principles.

Components of Journal Entries and Accounting Principles

In accounting, journal entries are used to record every financial transaction that a business makes. These entries follow specific rules to ensure the business’s financial records are accurate and balanced. The main goal is to keep the accounting equation balanced, which states:

Assets = Liabilities + Equity

where,

Assets = everything a company owns

Liabilities = paid for through what it owes

Equity = through the money invested by its owners

When a transaction happens, it impacts two or more accounts, ensuring that the accounting equation stays in balance.

For example, if you buy something on credit or sell something to a customer, you’ll need to make journal entries to show these changes. Every journal entry has two parts: a debit and a credit. Debits and credits are like opposite actions that help track the flow of money in and out of the business.

Now that we understand the fundamentals of debits and credits in accounts receivable, let’s look at how these transactions are recorded. In the next section, we’ll see examples of how businesses keep track of credit sales and payments using journal entries in double-entry bookkeeping.

Journal Entries and Accounting Principles: A Deeper Dive

To manage money the right way, it’s important to understand accounts receivable and how it works in bookkeeping. We’ll look at how businesses record sales made on credit, how they track payments, and how debits and credits help keep their financial records balanced.

How Do AR Transactions Fit in the Accounting Principles?

When a business sells something on credit, it needs to record it in a special way using journal entries. A journal entry is a way to write down what happened in the transaction. Let’s see how AR transactions fit into journal entries:

Example 1: Selling on Credit

Let’s say a business sells $100 worth of toys to a customer, but the customer will pay later. Here’s how the business would record this in the journal:

• Debit Accounts Receivable: This shows that the business is expecting to receive $100 from the customer in the future. So, it adds $100 to the accounts receivable.
• Credit Sales Revenue: Even though the business hasn’t gotten the money yet, it has made a sale. The business adds $100 to the sales revenue account because it has earned that money.

So, the business now has $100 in accounts receivable, and that’s a debit. At the same time, the business has earned $100 in revenue, and that’s a credit.

Example 2: Receiving Payment

A few days later, the customer pays the $100 they owe. The business now needs to record the payment:

• Debit Cash: This shows that the business has received $100 in cash. Since cash is increasing, this is a debit.
• Credit Accounts Receivable: This shows that the business no longer expects to get the $100 from the customer because the customer has paid. So, it removes the $100 from accounts receivable with a credit.

Principles of Double-Entry Bookkeeping

Every financial transaction in double-entry bookkeeping affects a minimum of two accounts, maintaining the balance of the accounting equation, which reads:

Assets = Liabilities + Equity

When you sell products or services on credit, you record the amount that customers owe you by creating an accounts receivable entry. To appropriately reflect the transaction, this procedure entails recording both a debit and a credit.

An Example of a Journal Entry for Receiving Payments and Crediting Sales

Imagine that you sell a customer $5000 worth of goods on credit. This is how you would document this transaction:

• Debit Accounts Receivable: $5000
• Credit Sales Revenue: $5000

This entry records the revenue received and increases your assets (accounts receivable). You make this entry to reflect the customer’s payment of the $5000 that is due. Upon receiving the payment, you make the following entry:

• Cash (Debit): $5000
• Accounts Receivable (Credit): $5000

As a result of the payment being received, your cash balance rises, and your accounts receivable falls.

Using Debits and Credits to Balance the Accounting Equation

The accounting equation must remain balanced for every transaction you document. Consider the credit sale scenario:

• A $5000 increase in accounts receivable is one of the assets.
• A $5000 increase in sales revenue is in equity.

When payment is received:

• With a $5000 increase in cash and a $5000 decrease in accounts receivable, assets total $5000. These entries preserve the integrity of your financial records by guaranteeing that your assets equal the sum of your liabilities and equity.

Peakflo’s Function in Credit and Debit Accounts Receivable Management

Cash flow maintenance depends on effective accounts receivable management. Tools like Peakflo can help you manage the money customers owe you by automatically sending payment reminders, keeping track of unpaid bills, and making invoices. Using Peakflo, along with simple accounting rules, makes it easier to keep your financial records correct and balanced.

The phenomenon of credit balances in accounts receivable will now be discussed. The next section will explain why credit balances occur and give ideas on how to fix them, like making the right changes in the records.

Credit Balances and Their Causes

When you manage your accounts receivable, you might see something called a credit balance. This happens when the amount shown is negative. Usually, overpayments, incorrect billing, or product returns cause this. Keeping accurate financial records and building strong relationships with customers depend on handling these things well. The following are typical reasons for credit balances:

1. Overpayments: Paying more than the amount on the bill can cause a surplus to be added to the customer’s account. For example, a credit balance is created when a customer makes two payments.
2. Billing Errors: Customers may overpay if there are errors like duplicate invoices or incorrect invoice amounts. To fix the disparities, these mistakes must be adjusted.
3. Product Returns: If customers return items after paying their invoices, the amount owed to them is reflected in a credit balance.

Strategies for Resolution

• Examine the Cause: Look into customer accounts and payment records to find out why the credit balance occurred. Talk to the customer to decide if you should give them a refund, use the credit for future bills, or change the current amount they owe.
• Make Correcting Journal Entries: Make sure that the resolution is reflected in your accounting records. For instance, to reduce the customer’s balance when issuing a refund for an overpayment, debit the sales revenue account and credit accounts receivable.

Through proactive credit balance management, you can preserve customer trust and guarantee accurate financial records.

After addressing credit balances, we will examine credit vs. debit accounts receivable. The next section will show how credits reduce the amount of money a company is owed by recording payments or returns, while debits show the money the company expects to collect, which increases the amount they are owed.

Credit vs. Debit Accounts Receivable

The differences between credit accounts receivable and debit accounts receivable are as follows:

Credit (Decreases in AR)	Debit (Increase in AR)
When a customer makes a payment, settles their outstanding balance, or a business records a bad debt write-off. A credit reduces the AR balance, showing that the obligation has been fulfilled.	When a sale is made on credit rather than through an immediate cash transaction. The AR balance increases, signifying that the company expects payment from the customer in the future.
When a payment is received, the money owed by customers (listed under “Accounts Receivable”) goes down, and the cash or bank balance goes up. If a write-off is recorded, it may also impact the income statement by increasing bad debt expenses.	It raises the “Accounts Receivable” amount on the balance sheet, showing that the company expects to receive money in the future. Simultaneously, it increases revenue on the income statement.
When the customer makes a payment of ₹10,000:Debit: Cash ₹10,000Credit: Accounts Receivable ₹10,000This entry reflects the receipt of payment and the settlement of the receivable.	If a company sells goods worth ₹10,000 on credit:Debit: Accounts Receivable ₹10,000Credit: Sales Revenue ₹10,000This entry records the revenue earned and the amount the customer now owes.
A credit to AR signifies that the customer has settled their dues, reducing the amount owed. If no further transactions exist, the AR balance for that customer reaches zero.	A debit to AR indicates that customers owe money to the company, meaning there are pending payments yet to be collected. It signifies an increase in the company’s receivables.
A credit to AR improves cash flow as it represents a payment received from a customer. Businesses strive for faster AR turnover to maintain liquidity and fund operations effectively.	Since AR represents credit sales, it does not provide immediate cash flow. Instead, the company must wait until customers make their payments. Efficient AR management ensures timely collections and minimizes outstanding receivables.
A low AR balance may indicate that the company is efficiently collecting payments, but if too many accounts are credited due to write-offs, it could signal issues with customer defaults or ineffective credit policies.	Excessive accounts receivable can create cash flow issues if customers delay payments. The company must implement strong credit policies and follow up on past-due invoices to avoid bad debts.

With Peakflo, you can get paid faster and make less work for yourself by automating invoices, sending payment reminders, and making the whole accounts receivable process easier. Peakflo helps by automatically tracking payments, making sure they’re recorded right away, and updating your balance as soon as payments come in. This reduces manual effort and speeds up the entire process, improving overall cash flow management.

Impact of Credit and Debit on Accounts Receivable

1. Role of Debits in Increasing AR Balance

Accurate financial management in accounting requires an understanding of how debits and credits impact your AR. When you sell services or products on credit, you increase the balance of your AR account and reflect the amount that customers owe you. This entry shows that the company is expecting to receive money from customers in the future. For instance, if you bill a customer $1,000, you would credit your sales revenue by the same amount and debit your AR by $1,000.

2. Use of Credits to Decrease AR

In contrast, you record a credit to your AR account, lowering its balance, when customers pay or return items. By offsetting the original debit, this action shows that the amount owed has been paid in full or partially. For example, when the client pays you $1,000, you debit your cash account by the same amount and credit your AR by $1,000.

Effectively handling these transactions ensures that the financial health of your business is appropriately reflected in your financial records.

You can make this process easier by using accounts receivable software like Peakflo. Peakflo helps keep your cash flow steady and your records organized by automatically creating invoices, sending payment reminders, and handling reconciliation tasks.

By using these tools, you can spend less time on manual financial management duties and more time expanding your company.

After gaining a firm grasp of how debits and credits affect AR, the next step is to focus on efficient management techniques. We’ll look at how businesses can reduce unpaid bills and make sure they get paid on time by using automatic reminders, keeping track of overdue payments, and setting clear rules for when payments are due.

Accounts Receivable Management Strategies

Managing AR is important to keep your business financially healthy. By automating AR tasks, setting clear rules for credit, and keeping track of late payments, you can improve cash flow and reduce the chances of losing money from unpaid debts.

1. Clearly Define the Terms of Your Credit

Establish clear credit policies so that your clients know what to expect. For example, offering net 30 terms means customers have to pay within 30 days after getting the bill, which helps make sure they pay on time.

2. Automate AR Procedures

Use tools that automate tasks like checking accounts, reminding people to pay, and sending bills to make things faster and easier. Automation helps get more done and makes fewer mistakes. Platforms like Peakflo can help make sure money comes in on time and all records stay correct by automating invoicing, checks, and reminders.

3. Keep an Eye on Past-Due Accounts and Take Appropriate Action

To identify past-due invoices, periodically examine your credit and debit accounts receivable aging reports. Use systematic follow-up techniques to handle late payments promptly. You can get paid faster and keep your customers happy by using automatic reminders and personal messages.

By using these methods to manage the money customers owe you, your business can have more cash coming in and become financially stronger.

Use Peakflo automation tools to make tasks like reconciliation, payment reminders, and invoicing more efficient. Peak flow can help ensure consistent cash flow and accurate records. Peakflo helps businesses save money, respond faster, and be more accurate when talking to customers. It can reduce costs by up to 70%, double the speed of replies, and ensure 99% accuracy. This makes it a great tool for better-managing accounts receivable.

Now that we’ve talked about how to manage accounts receivable, let’s look at the best ways to do it. In this section, we’ll cover important strategies like automating tasks, setting credit rules, and regularly checking reports to see which bills are overdue.

Best Practices for Accounts Receivable

Comprehending accounts receivable preserves the financial stability of your company. Accounting records AR as a debit, increasing your assets when you sell products or services on credit. At the same time, you reflect the income received by crediting your sales revenue.

To effectively manage your AR, consider these best practices:

1. Reduce Manual Errors by Automating Procedures

Managing AR tasks manually can lead to mistakes and wasted time. By automating things like matching records, sending bills, and reminding people to pay, you can avoid mistakes and save time for other tasks.

Peakflo helps businesses by making payment collection and invoicing easier, so they get paid faster.

2. Establish Credit Control Procedures to Evaluate the Creditworthiness of Customers

To assess your clients’ financial capacity, establish clear credit policies. Before extending credit to new clients, evaluate their creditworthiness and set payment terms, such as net 30 days. By setting appropriate credit limits based on a risk assessment, you can avoid future payment issues.

3. Track Outstanding Invoices by Routinely Reviewing AR Aging Reports

Regularly examining AR aging reports helps you identify past-due accounts and take prompt action. By closely monitoring unpaid invoices, you can follow up with clients quickly, reducing the risk of bad debts and improving cash flow.

You can make managing your credit and debit accounts easier, which helps your business run better and stay financially stable.

How Peakflo Assists in Accounts Receivable Best Practices?

The goal of Peakflo is to assist companies in streamlining and optimizing their accounts receivable procedures, guaranteeing timely payments, effective collections, and accurate financial records. Let’s examine how Peakflo facilitates best practices for managing accounts receivable.

1. Automating Reminders for Payments: Peakflo helps by sending friendly reminders to customers before their payment is due and automatically checking in with them after the payment deadline has passed. Peakflo automates this process. This improves cash flow overall and saves time for businesses by preventing missed payments.
2. Monitoring Unpaid Amounts: With Peakflo, you can easily see which bills haven’t been paid, which customers still owe money, and how long those bills have been overdue. This helps businesses keep track of payments and decide which accounts need attention first.
3. Simplifying the Invoicing Process: With Peakflo, you can easily create and send invoices directly from the platform, making the invoicing process faster and simpler. Peakflo makes sure the invoices are clear, accurate, and complete, so there are fewer chances for mistakes or confusion, whether you’re using a template or making your own.
4. Flexible Payment Options: Peakflo assists companies in offering flexible payment options to their clients. You can enable their customers to pay using a variety of methods, including bank transfers, credit cards, and other digital payment solutions, by integrating their payment systems.
5. Cash Flow Optimization: Peakflo makes sure that accounts receivable are effectively managed, which helps to maintain a healthy cash flow. The service can assist in tracking past-due accounts, automating reminders, and setting up payment terms, all of which will help the company collect payments promptly.
6. Financial System Integration: Accounting software and additional financial tools are easily integrated with Peakflo. As a result, the accounting equation (Assets = Liabilities + Equity) remains balanced, and every payment reminder and transaction is automatically documented in your books.
7. Decreasing AR Disputes: Peakflo helps minimize these problems by maintaining transparent records and communication. With all of the information regarding invoices, payments, and customer interactions in one location, you can promptly settle disagreements and stop them from escalating.
8. Reporting and Insights in Real-Time: Peakflo gives companies access to real-time reports and information about the state of their accounts receivable. This gives businesses the information they need to make decisions by providing them with aging reports, payment trends, and detailed views of cash flow.
9. Improving Relationships with Customers: Peakflo guarantees that customer relationships are upheld in addition to assisting businesses in more efficiently collecting payments. You can build goodwill and guarantee long-term relationships by reminding clients about payments in a non-intrusive way, automating reminders, and maintaining open lines of communication.
10. Bad Debt Risk Management: Lastly, Peakflo helps companies recognize possible collection problems early on, which lowers the risk of bad debts. You can reduce the likelihood of bad debts by taking proactive measures, like negotiating payment plans or halting additional credit if they have clear visibility into accounts that are approaching past due.

Peakflo’s suite of services ensures seamless financial operations, automates processes and provides insights to help businesses follow best practices in accounts receivable. By using Peakflo, companies can enhance cash flow, lessen the administrative load, and develop an AR management procedure that is more effective and efficient.

Conclusion

Keeping your accounts receivable in good condition requires efficient debit and credit management. When you sell products or services on credit, this asset account increases, and a debit is recorded in AR. As customers make payments, you debit your cash account to reflect the inflow of funds and credit AR to indicate the reduction in outstanding receivables.

By following this process, you ensure that your financial records accurately reflect both your available cash and outstanding receivables. A rise in AR indicates more unpaid invoices, which, if not managed properly, can strain cash flow. Conversely, a decline suggests successful collections, strengthening your cash reserves. Effective AR management involves timely invoicing, establishing clear payment terms, and promptly following up on overdue accounts. Strict credit policies can reduce overdue payments and improve overall cash flow management.

Your company’s financial stability depends on effectively managing debits and credits in AR. By understanding these principles and using tools like Peakflo, you can ensure accurate financial records and maintain a healthy cash flow.

Peakflo automates invoicing, sends payment reminders, and manages reconciliation tasks, helping you maintain consistent cash flow and accurate records. By adopting such tools, you can focus more on growing your business and spend less time on manual financial management. Schedule a demo with Peakflo today.