Accounts Receivable Journal Entries

Accounts Receivable Journal Entries
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  • 0:03 Making a Sale on Credit
  • 1:11 Bad Debts Expense
  • 1:50 Allowance for Bad Debts
  • 2:50 Lesson Summary
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Lesson Transcript
Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

This lesson will introduce you to accounting for receivables. The journal entries regarding booking sales, customer payments and taking credit losses will be illustrated with examples.

Making a Sale on Credit

Carla's Clothing is a mid-priced retailer of women's apparel. Carla loves selling apparel, but at the end of the day she just has to close the store and do her bookkeeping. Most customers nowadays pay with a bank credit card, but Carla still maintains a Carla's store card for some older customers. Many of them have had her card since their mothers first brought them to the store many years ago, and she just doesn't have the heart to discontinue it. Having a store card creates some additional bookkeeping work, though, and that is what Carla's getting ready to do right now. Mrs. Jones bought a few things today and paid with a store card. Carla makes these journal entries to reflect the sale, which you can see below, in which $700 is placed in both the Accounts Receivable and Sales Revenue rows:

AR 1

Accounts receivable is an asset account, since credit customers owe her payments. Sales revenue is an equity account, which will go on the income statement. When Mrs. Jones pays $100 on her account next month, Carla will make the following entries - $100 both in the Cash and Accounts Receivable rows:

AR 2

The credit to accounts receivable reduces what the customers owe her.

Bad Debts Expense

Carla knows that not all of her credit customers are going to pay her back, as life just gets in the way sometimes. When Judy Jackson passed away last month, she still had a balance owed on Carla's books of $400. Carla knows this money will never be repaid, so she took the loss and closed out Judy's account. Carla's journal entries looked like this one below, where $400 is in both the Accounts Receivable and Bad Debts Expense rows:

AR 3

Bad debts expense is an expense account, and like other expense accounts for rent and salaries, it reduced her income. The credit to accounts receivable reduces what Carla is owed since she closed out Judy's account.

Allowance for Bad Debts

Larger businesses with many more dollars in accounts receivable will set up an allowance for bad debts account. This, as the name suggests, allows for bad debts expense to be taken based on previous experience with losses rather than as events happen. It keeps the income statement from going up and down so much from month to month.

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