9 Accounts Receivable

In this chapter we’ll learn about accounts receivable (A/R): how A/R increases in value, how A/R decrease in value, and how we measure A/R on the Statement of Financial Position. Accounts receivable is a current asset account that tells us how much a company expects to receive from customers for past sales. It is classified as current because we expect customers to pay their accounts within one year. Sometimes accounts receivable is shortened to A/R. Like all asset accounts (except of course those tricky contra-accounts!), A/R has a natural balance of debit. That means that the A/R balance gets bigger when we debit, and smaller when we credit the account.

A/R is cash that customers owe to the company, so it should make sense that the A/R balance gets higher when customers purchase from the company. For example, if a company sells 100 t-shirts to Customer Inc. for $25 per t-shirt, but does not collect the cash at the point of sale, the transaction would be entered into the company’s accounts like this:

So, the A/R balance goes up when a company extends credit to customers, as seen in this example… But what makes A/R go down? Great question! The A/R balance decreases when customers pay off their accounts. Intuitively this makes sense, right? When a customer pays cash, they owe the company less money. For example, let’s say that Customer Inc. sends the t-shirt company a cheque for $1,000. The company will have an extra $1,000 in their bank account from depositing the cheque, and A/R will decrease because the customer now owes $1,000 less than they did before. This is the journal entry used to change the balances in Cash and A/R:

Quick Summary:

accounts receivable is a current asset that increases with credit sales and decreases with receipt of payment.