Help With Accounting for Receivables
When you run a business, you may have clients or customers who owe you money. You may have provided a service and sent invoices out, and now you're waiting to get paid. This type of situation is recorded in the accounting books as receivables -- funds not yet received, but recognized as revenues.
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Standard Jounal Entries
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The journal entry to recognize a receivable is to debit a receivable account and to credit a revenue account. The receivable account reports in the balance sheet, while the revenue account reports in the income statement. When an account receivable is paid, the journal entry is to debit cash account, increasing it, and credit the receivable account, decreasing its balance. Once all receivables are paid up, the balance in the receivable account should be zero.
Discounts
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Often, businesses offer discounts if customers pay within a certain period of time. The U.S. Chamber of Commerce website states that common terms of credit include a discount of 1 to 2 percent when customers pay within 10 days. Since firms don't know which customers will take advantage of the discount, they book the receivables at full price, ignoring the discount. When payments are made with the discount, the journal entry is to debit cash and the discount accounts, while a credit is applied toward the receivable account, decreasing it.
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Bad Debt
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Unfortunately, some receivables will not be paid up and a business needs to recognize this situation in the books. There are two methods to recognize bad debts: the direct and the allowance methods. Under the direct method, when an account needs to be written off, a debit is applied toward a bad debt expense, while a credit is used in the receivable account. Under the allowance method, an estimate is done for the year for bad debt, and the entry is to debit a bad debt expense and to credit an allowance for bad debt account that reports in the balance sheet, netting against the receivable.
Computerized Systems
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When using an accounting system to process receivables, journal entries are performed in the background. The receivable module needs to be set up properly to book transactions in the correct accounts in the general ledger. An "Aging Account Receivable" report can be generated with detail information about who owes the business, how much and for how long. The total in this report should match the balance in the receivable account in the general ledger. If the numbers don't match, corrections need to be done, usually to the general ledger.
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