Accounts Receivable is when a company has performed services or provided goods to a client but has not yet been paid. In other words, money that is owed to a company from its customers for sales that the company made to its customers.
Accounts receivable (AR) is an asset account and is shown on the balance sheet. As we previously discussed, gross accounts receivable may be reduced by an allowance for doubtful accounts (ADA) to yield net accounts receivable (if the allowance method is being used). In the case of a direct method, there will be no allowance account.
A debit to AR will increase AR since it is an asset account with a normal debit balance.
The corresponding credit will be to a revenue account because accounts receivable is recording money that we are owed from sales to our customers.
Note that under the accrual method, we recognize revenue when earned and recognize expenses when incurred.
We decrease accounts receivable with a credit. When AR is reduced with a credit, the corresponding debits can be a debit to cash, a sales discount (contra revenue account), or a write off (through bad debt expense or ADA).
Example:
On March 1, 2020, we perform consulting services for a client, Tanner Wilson, Inc ("TWI") and send an invoice to TWI for $40,000. Record the journal entry reflecting the above transaction.
Step 1: We’re going to debit accounts receivable for $40,000 to increase the amount we’re owed from this customer. Then we’re going to credit Service Revenue for $40,000 to recognize our revenue.
                Debit  CreditÂ
Accounts Receivable $40,000
  Service Revenue                    $40,000
Step 2: When our client receives the invoice we sent, they are going to debit Service Expense for $40,000, which will increase that expense, and credit Accounts Payable for $40,000 to increase AP (liability account).
 Debit   CreditÂ
Service Expense $40,000
  Accounts Payable                $40,000
Accounts Receivables are an important factor in the working capital of a company. If it is too high, the company may be lax in collecting what it owes, and may soon find it hard to find the cash to pay the bills. If it is too low, the company may inadvertently harm client relationships or not offer competitive terms of payment.
