Credit
Journal Entry 1 shows how a $1,000 sale may be recorded. The journal entry shows a $1,000 debit to accounts receivable (sometimes abbreviated A/R) and a $1,000 credit to sales revenue. To record a $1,000 sale — a credit sale — the journal entry needs to show both the $1,000 increase in accounts receivable and the $1,000 increase in sales revenue.
Recording a payment
When the business receives payment from the customer for the $1,000 receivable, the business records a journal entry like that shown in Table 3-2.
TABLE 3-2 Journal Entry 2: Recording the Customer Payment
| Account | Debit | Credit |
|---|---|---|
| Cash | $1,000 | |
| Accounts receivable | $1,000 |
Journal Entry 2 shows a $1,000 debit to cash, which is the $1,000 increase in the cash account that occurs because the customer has just paid you $1,000. Journal Entry 2 also shows a $1,000 credit to accounts receivable. This credit to the accounts receivable asset account reduces the accounts receivable balance.
At the point when you record journal entries 1 and 2, the net effect is a $1,000 debit to cash (showing that cash has increased by $1,000) and a $1,000 credit to sales revenue (showing that sales revenue has increased by $1,000). The $1,000 debit to accounts receivable and the $1,000 credit to accounts receivable net to zero.
If you think about this accounts receivable business a bit, you should realize that it makes sense. Although the accounts receivable account includes a $1,000 receivable balance, this just means that the customer owes you $1,000. But when the customer finally pays off the $1,000 bill, you need to zero out that receivable.
QuickBooks, by the way, automatically records journal entries 1 and 2 for you. Journal Entry 1 gets recorded whenever you issue or create a customer invoice. Therefore, you don’t need to worry about the debits and credits shown in Journal Entry 1 except on one special occasion: When you set up QuickBooks and QuickBooks items, you do specify which account should be credited to track sales revenue. So although you may not need to worry much about the mechanics of Journal Entry 1, you should understand how this journal entry works so that you can set up QuickBooks correctly. (Book 2, Chapter 1 describes the mechanics of setting up QuickBooks.)
Journal Entry 2 also gets recorded automatically by QuickBooks. QuickBooks records Journal Entry 2 for you whenever you record a cash payment from a customer. You don’t need to worry, then, about the debits and credits necessary for recording customer payments. I find that it’s helpful, however, to understand how this journal entry works and how QuickBooks records this customer payment transaction.
Estimating bad-debt expense
One other important journal entry to understand is shown in Table 3-3.
TABLE 3-3 Journal Entry 3: Recording an Allowance for Uncollectible Accounts
| Account | Debit | Credit |
|---|---|---|
| Bad-debt expense | $100 | |
| Allowance for uncollectible A/R | $100 |
Journal Entry 3 records an estimate of the uncollectible portion of accounts receivable. (Businesses that don’t want to keep accrual-based accounting statements may not need to worry about Journal Entry 3.) Unfortunately, some of the money you bill customers may be uncollectible. Yet Journal Entry 1 records every dollar that you bill your customers as revenue. Therefore, you need a way to offset, or reduce, some of the sales revenue by the amount that ultimately turns out to be uncollectible.
Journal Entry 3 shows a common way of doing this. This entry debits bad-debt expense — which is an expense account that you may use to record uncollectible customer receivables. Journal Entry 3 also credits another account shown as allowance for uncollectible A/R. This allowance account is called a contra-asset account, which means that it basically reduces the balance reported on the balance sheet of an asset account. In the case of the allowance for uncollectible A/R accounts, for example, this $100 credit reduces the accounts receivable balance shown in the balance sheet by $100.
Where the bad-debt expense shown in Journal Entry 3 appears varies from business to business. Some businesses report the bad-debt expense with the other sales revenue, thereby allowing the income statement to show net sales revenue; other businesses report it with the other operating expenses. You should report bad-debt expense wherever it makes most sense in terms of managing your business.
Removing uncollectible accounts receivable
If you do set up an allowance for uncollectible accounts, you also need to remove the uncollectible accounts periodically from both the accounts receivable balance and the allowance for uncollectible accounts. You don’t want to do this while any chance to collect on the accounts exists. But at some point, obviously, you may as well clean out the bad receivables from your records. It makes no sense, for example, to have uncollectible receivables from 17 years ago still appearing in your balance sheet. Table 3-4 illustrates how to clean out bad receivables.
This journal entry debits the allowance from the uncollectible A/R account for $100. The journal entry also credits the accounts receivable account for $100. In combination, these two entries zero out the allowance for the uncollectible A/R account and remove the uncollectible amount from the accounts receivable account.
TABLE 3-4 Journal Entry 4: Writing Off an Uncollectible
