What is an accounts receivable journal entry: Definition and examples
- Understanding accounts receivable
- Accounts receivable vs. accounts payable
- How accounts receivable journal entries work
- Key examples of accounts receivable journal entries
- Adjusting and correcting accounts receivable entries
- Streamlining your AR journal entries for financial success
An accounts receivable journal entry is a financial record that logs a sale made on credit, tracking the amount of money a business is owed until payment is received. It ensures that revenue is recorded accurately and that outstanding balances are properly managed. Accurate accounts receivable (AR) entries help businesses forecast cash flow, reduce bad debt, and comply with financial reporting standards.
Understanding accounts receivable
Accounts receivable refers to the money a business is owed by customers who have purchased goods or services on credit. It represents a short-term asset on the balance sheet, reflecting revenue that has been earned but not yet received.
When a business sells on credit, it records accounts receivable instead of immediate cash. This allows customers to buy now and pay later, which is an essential practice in B2B transactions. Without proper AR management, businesses risk cash flow shortages and delayed collections.
Accounts receivable works through invoicing and collection. Once a sale is made, the company issues an invoice with payment terms, typically 30, 60, or 90 days. Until the customer pays, the business tracks AR as a current asset. Once payment is received, AR decreases, and cash increases.
Accounts receivable vs. accounts payable
Accounts receivable is money owed to a business by customers, while accounts payable is money a business owes to its suppliers or creditors.
Accounts Receivable (AR) | Accounts Payable (AP) | |
|---|---|---|
Definition | Money owed to the business from customers who purchased on credit. | Money the business owes to suppliers for purchases made on credit. |
Balance sheet placement | Recorded as an asset (expected cash inflow) | Recorded as a liability (amount owed) |
Impact on cash flow | Increases cash when collected | Decreases cash when paid |
Example | A business sells products on credit and records AR | A business purchases supplies on credit and records AP |
Payment terms | Typically 30, 60, or 90 days for customers to pay | Typically 30 days to settle vendor invoices |
Risk | Late payments can lead to bad debt expenses and cash shortages | Delayed payments can damage supplier relationships |
Accounts receivable (AR) and accounts payable (AP) track a company’s incoming and outgoing payments, but they serve opposite functions. Poor AR management leads to cash flow shortages, while delayed AP payments can hurt supplier relationships.
How accounts receivable journal entries work
When a business makes a credit sale, it records the transaction through an accounts receivable journal entry. This process follows the principle of double-entry bookkeeping, where two accounts are always affected—one debited and one credited.
The first step is to debit accounts receivable. This action increases the business’s outstanding balance, reflecting the amount owed by the customer. At the same time, the business credits sales revenue, acknowledging the income earned from the sale of goods.
When the customer eventually pays, a new journal entry is made. The business debits cash, increasing the cash balance and credits accounts receivable, reducing the amount the customer owes.
For example, if a business sells $1,000 worth of goods on credit, the journal entry would look like this:
- Debit accounts receivable: $1,000
- Credit sales revenue: $1,000
Once the customer makes a payment, the accounting records:
- Debit cash: $1,000
- Credit accounts receivable: $1,000
Effective management of accounts receivable journal entries ensures businesses can track outstanding account balances and maintain smooth cash flow.
Instead of manually categorizing every transaction, finance teams can rely on finance automation software for transaction categorization, which automatically suggests the correct General Ledger (GL) account for new expenses.
Key examples of accounts receivable journal entries
The accounts receivable journal entries help track outstanding customer payments and ensure accurate financial statements. Managing AR efficiently ensures timely collections, improves cash flow, and avoids potential financial strain.
Recording a credit sale
When a business sells goods or services on credit, it must record the transaction in the accounts receivable journal. This entry helps track the money the customer owes until payment is received.
The process begins with debiting accounts receivable to reflect the increase in outstanding payments due from the customer. Simultaneously, the business credits a sales revenue account, recognizing the income from the sale.
For example, if a company sells $1,000 worth of products on credit, the journal entry would be:
- Debit accounts receivable $1,000
- Credit sales revenue $1,000
This entry ensures the sale is recorded properly and shows the amount expected to be paid in the future.
Handling partial payments and payment plans
In cases where customers make partial payments or set up payment plans, businesses need to record these transactions accurately to reflect the outstanding balance. This ensures that the accounts receivable ledger stays current and that cash flow is properly tracked.
When a customer makes a partial payment, the business debits cash to increase its cash balance and credits accounts receivable to reduce the amount owed. For example, if a customer owes $1,000 but only pays $500, the journal entry would be:
- Debit cash $500
- Credit accounts receivable $500
The business needs to track each installment if the customer is on a payment plan. Each payment would follow the same process of debiting cash and crediting accounts receivable. This ensures the business can monitor the progress of payments while maintaining accurate financial records.
Most businesses offer payment plans to their customers, especially for higher-ticket items or services. Tracking these payments properly prevents confusion and helps businesses manage overdue payments, ensuring they are paid in full within the agreed time frame.
For businesses with frequent partial payments or ongoing payment plans, Ramp bulk editing and mark-as-ready features allow finance teams to process multiple financial transactions at once, speeding up the workflow and ensuring all entries are accurate, regardless of how many customers are involved.
Dealing with late payments and interest charges
Late payments are a common challenge for businesses, and handling them properly in the accounts receivable journal is crucial for maintaining accurate records and protecting cash flow. When a customer misses a payment deadline, the business may charge interest on the overdue amount.
To record late payments, the business debits accounts receivable for the original amount owed and credits an interest income account. For example, if a customer owes $1,000 and is charged $50 in interest, the income statement’s journal entry would look like this:
- Debit accounts receivable $1,050
- Credit interest income $50
- Credit accounts receivable $1,000 (the original amount owed)
This ensures the overdue balance and interest charge are accurately tracked. Businesses often set specific terms for late payments, such as charging 1.5% per month on overdue amounts, which can help encourage timely payments.
Nearly 32% of small businesses report that late payments significantly impact their cash flow. By properly recording these interest charges and tracking overdue accounts, businesses can reduce the negative effects of late payments and maintain financial stability.
Accounting for early payment discounts and trade discounts
Businesses often offer early payment discounts or trade discounts to incentivize customers to pay quickly or to establish favorable relationships with suppliers. To maintain accurate financial records, it's important to account for these discounts properly in the accounts receivable journal.
When a customer takes advantage of an early payment discount, the business records the discounted amount in the journal. For example, if a business offers a 2% discount on a $1,000 invoice for payment within 10 days, and the customer pays $980, the journal entry would look like:
- Debit cash $980
- Debit sales discount $20
- Credit sales revenue $1,000
For trade discounts, businesses typically reduce the price of goods or services upfront, so there’s no need to record a separate discount entry. The journal entry for a trade discount is the same as for a regular sale, but the sale amount will reflect the reduced price.
Offering these discounts can boost cash flow, as most businesses report quicker payments when they provide early payment discounts. Properly recording these discounts ensures that revenue and accounts receivable balances remain accurate, helping businesses avoid financial discrepancies.
Adjusting and correcting accounts receivable entries
Adjusting and correcting accounts receivable transactions is crucial to maintaining accurate financial records. Errors, changes in payment terms, or disputes may require updates to the original journal entries to ensure your AR balance and financial statements are correct.
For instance, if a billing mistake occurs and a customer is overcharged by $100, the business would need to adjust the AR entry. This would involve crediting accounts receivable by $100 to reduce the amount owed and debiting sales revenue to reflect the corrected amount.
Similarly, if a customer disputes a charge and a resolution leads to a discount or refund, the business must adjust the AR by crediting accounts receivable for the discount amount and debiting the discount account.
When a customer makes partial payments, businesses need to update the AR balance to reflect the actual amount paid. For example, if a customer was originally expected to pay $500 but only paid $300, the business would debit cash for $300 and credit accounts receivable for the same amount, reflecting the payment received and leaving the remaining balance in AR.
Correcting AR entries as soon as discrepancies arise is essential. Most businesses report issues with AR discrepancies; making regular adjustments is key to avoiding errors during audits and ensuring accurate financial reporting. Proper corrections help businesses stay on top of cash flow, minimize misreporting, and accurately track customers' outstanding balances.
Streamlining your AR journal entries for financial success
Effectively managing accounts receivable journal entries is a key driver of your business’s financial health. As you accurately record credit sales, payments, discounts, and adjustments, you ensure that your financial records reflect the true state of your cash flow.
Since most B2B transactions are conducted on credit, the importance of efficient AR management cannot be overstated. Timely and accurate journal entries give you better control over collections, reduce the risk of errors, and help you make informed decisions that keep your business running smoothly.
As businesses face an average of 51 days to collect receivables, having a solid AR system in place is critical to staying on top of payments and maintaining financial stability.
Streamlining accounts receivable journal entries with Ramp’s accounting automation platform enhances cash flow management and reduces errors. This automation frees up valuable time for finance teams to focus on strategic initiatives. With automated categorization, bulk editing, and real-time insights, Ramp transforms the AR process from a routine task into a strategic advantage.
FAQs
When a business charges interest on late payments, the interest amount is typically recorded as interest income in the AR journal entry. The entry will include debiting accounts receivable for the full outstanding amount (principal + interest) and crediting interest income for the interest charged.
If a customer overpays, the business will credit unearned revenue and debit cash. The customer can ask for a cash refund, or allow the business to keep the dollars to apply to a future purchase. If underpaid, the business must track the outstanding balance and adjust the AR balance to reflect the correct amount owed, including any adjustments for partial payments or discounts.
A credit memo is issued when a customer returns goods or is granted a price adjustment. To record this in the AR journal, the company credits accounts receivable (reducing the amount owed by the customer) and debits sales returns or allowances to account for the reduction in revenue. This ensures that the customer’s balance reflects the new, lower amount.
When a business receives a customer deposit, it is recorded as a liability rather than revenue. The journal entry will credit customer deposits (a liability account) and debit cash. Once the service or goods are delivered, the deposit is then reclassified into revenue, following the usual AR entry process.
“When our teams need something, they usually need it right away. The more time we can save doing all those tedious tasks, the more time we can dedicate to supporting our student-athletes.”
Sarah Harris
Secretary, The University of Tennessee Athletics Foundation, Inc.
“Ramp had everything we were looking for, and even things we weren't looking for. The policy aspects, that's something I never even dreamed of that a purchasing card program could handle.”
Doug Volesky
Director of Finance, City of Mount Vernon
“Switching from Brex to Ramp wasn’t just a platform swap—it was a strategic upgrade that aligned with our mission to be agile, efficient, and financially savvy.”
Lily Liu
CEO, Piñata
“With Ramp, everything lives in one place. You can click into a vendor and see every transaction, invoice, and contract. That didn’t exist in Zip. It’s made approvals much faster because decision-makers aren’t chasing down information—they have it all at their fingertips.”
Ryan Williams
Manager, Contract and Vendor Management, Advisor360°
“The ability to create flexible parameters, such as allowing bookings up to 25% above market rate, has been really good for us. Plus, having all the information within the same platform is really valuable.”
Caroline Hill
Assistant Controller, Sana Benefits
“More vendors are allowing for discounts now, because they’re seeing the quick payment. That started with Ramp—getting everyone paid on time. We’ll get a 1-2% discount for paying early. That doesn’t sound like a lot, but when you’re dealing with hundreds of millions of dollars, it does add up.”
James Hardy
CFO, SAM Construction Group
“We’ve simplified our workflows while improving accuracy, and we are faster in closing with the help of automation. We could not have achieved this without the solutions Ramp brought to the table.”
Kaustubh Khandelwal
VP of Finance, Poshmark
“I was shocked at how easy it was to set up Ramp and get our end users to adopt it. Our prior procurement platform took six months to implement, and it was a lot of labor. Ramp was so easy it was almost scary.”
Michael Natsch
Procurement Manager, AIRCO
