September 26, 2008, Newsletter Issue #98: Accounts Receivable

Tip of the Week

Accounts receivable is defined as the transaction that occurs when a company's customer purchases the company's product or service and promises to pay in the future. The customer receives the goods or service but does not pay for it now. This promise to pay the company in the future establishes an accounts receivable for the company. An accounts receivable is considered an asset on the company's books (financial statements). It also is known as a current asset due to its ability to be converted into cash quickly. Typically, accounts receivable carry a debit balance on the company's books and on the financial statements.

The accounting transaction for recording the occurrence of an accounts receivable is: debit accounts receivable and credit sales. This increases the asset account (accounts receivable), and also increases the revenue account (sales being the revenue account). As the account is paid off by the customer, the accounts receivable account decreases and cash increases. Hence, cash is debited while accounts receivable is credited.

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