What is an accounts receivable journal entry: Definition and examples

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

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) 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.