Accounts Receivable (AR) Process with Accounting Entries

 Complete Accounts Receivable (AR) Process with Accounting Entries

Managing Accounts Receivable (AR) effectively ensures steady cash flow and minimizes financial risk. Below is a step-by-step AR process, from invoice generation to payment collection, including accounting entries at each stage. 1️⃣ Sales & Invoice Generation When a company sells goods or services on credit, it records the transaction as an account receivable. 📌 Entry: Dr. Accounts Receivable (Asset) 🏦 Cr. Sales Revenue (Income) 💰 ✅ This records revenue and recognizes the customer's obligation to pay. 2️⃣ Payment Tracking & Collections The AR team monitors due dates, sends reminders, and follows up on overdue invoices. (No entry here—only tracking and reporting). If payment is delayed, the company may impose late fees or interest charges: 📌 Entry (if applicable): Dr. Accounts Receivable (Asset) 🏦 Cr. Interest Income (Income) 💰 ✅ This recognizes additional revenue from late fees. 3️⃣ Payment Received from Customer When the customer pays, the company records the receipt and clears the outstanding balance. 📌 Entry: Dr. Cash/Bank (Asset) 💵 Cr. Accounts Receivable (Asset) 🏦 ✅ This settles the receivable and increases cash flow. 4️⃣ Discounts & Deductions (if applicable) If the customer is offered an early payment discount, the receivable is adjusted. 📌 Entry (for early payment discount): Dr. Cash/Bank (Asset) 💵 Dr. Sales Discount (Expense) 📉 Cr. Accounts Receivable (Asset) 🏦 ✅ This records the reduced payment due to a discount. 5️⃣ Provision for Bad Debts (End of the Period Estimate) At the end of an accounting period, companies estimate potential bad debts (e.g., 2% of total AR) and create a provision. 📌 Entry: Dr. Bad Debt Expense (P&L Expense) 📉 Cr. Provision for Bad Debts (Contra Asset) ❌ ✅ This anticipates credit losses and ensures accurate financial reporting. 6️⃣ Writing Off an Uncollectible Account If a specific customer defaults, the company removes the bad debt from AR using the previously created provision. 📌 Entry: Dr. Provision for Bad Debts (Contra Asset) ❌ Cr. Accounts Receivable (Asset) 🏦 ✅ This clears the uncollectible balance without affecting current profit. 7️⃣ Recovery of a Previously Written-Off Bad Debt If a customer later pays a debt that was written off, the company first reinstates the receivable and then records the payment. 📌 Step 1: Reverse the Write-off Dr. Accounts Receivable (Asset) 🏦 Cr. Provision for Bad Debts (Contra Asset) ❌ 📌 Step 2: Record the Payment Dr. Cash/Bank (Asset) 💵 Cr. Accounts Receivable (Asset) 🏦 ✅ This restores the receivable and records the cash inflow. 8️⃣ Bank Reconciliation & Reporting Once payments are received, they are reconciled with bank statements, and financial reports (aging analysis, cash flow) are generated.