Waiting for customer payments can be frustrating, mainly when it affects your cash flow. Whether you run a small business or manage company finances, tracking money owed to you is essential. This is where Accounts Receivable (AR) comes in; it represents the amount customers owe after purchasing on credit. But when your accounts receivable increase, is it recorded as a debit or credit?
Understanding this is key to keeping your financial records accurate. According to the Federal Reserve Bank of New York’s latest 2025 report, 60% of credit card users in the U.S. carry a balance each month. Just like individuals manage borrowed money, businesses need to record AR to stay financially stable properly.
In this blog, we’ll explain what accounts receivable means in accounting and clarify whether an increase in AR is a debit or credit. We’ll also walk you through an example of journal entries and share best practices for managing AR to improve cash flow and reduce late payments.
Accounts receivable (AR) is the money your customers owe you after purchasing goods or services on credit.
Now that you understand what accounts receivable is, let’s clarify whether it’s recorded as a debit or credit in accounting.
Accounts receivable is a debit account because it represents money owed to your business by customers who purchased on credit. Since AR is an asset, it follows the accounting rule that assets increase with a debit and decrease with a credit.
Understanding that accounts receivable is a debit is just the first step, let’s explore why this is the case.
If you’ve ever wondered why accounts receivable is recorded as a debit, it all comes down to its role in your business’s finances.
AR is an asset because it represents money your business expects to receive in the future. Just like cash in your bank, it holds value for your company.
The foundation of accounting is the equation:
Assets = Liabilities + Equity
Since accounts receivable is an asset, it increases with a debit, just like other assets such as cash or inventory.
Every transaction in accounting follows a pattern.
With that in mind, let’s explore what happens when accounts receivable go up or down in your accounting records.
Keeping track of how accounts receivable moves up and down is important for managing cash flow. This is how it works:
Now, let’s put this into practice with a journal entry example for accounts receivable.
Numbers tell the story best. Here is how a sale on credit and its payment look in a journal entry:
Sale on Credit ($500):
Payment Received ($500):
Recording accounts receivable correctly is just one part of the equation, keeping them under control is another, let’s look at the best ways to manage them effectively.
Late payments can slow down operations, so it’s important to have a solid strategy in place. Here are some best practices to help you stay on top of your receivables:
Not every customer should get credit. Set clear criteria for who qualifies and define payment terms like Net 30 or Net 60 upfront. Make sure customers understand these terms to avoid confusion and late payments.
Using accounting software can make invoicing, payment tracking, and follow-ups much easier. Automation reduces manual errors and speeds up collections, ensuring payments don’t slip through the cracks.
Regularly track key indicators like Days Sales Outstanding (DSO) to measure how efficiently you’re collecting payments. Also, reviewing aging reports helps you spot overdue accounts before they become a bigger issue.
Make sure invoices go out immediately after delivering goods or services. Double-check for errors in pricing or details; small mistakes can lead to delays and disputes that slow down payments.
A structured follow-up process is key to keeping receivables under control. Be polite but firm when reminding customers about overdue payments, and escalate the process if needed.
If managing overdue accounts becomes challenging, companies like South East Client Services Inc. (SECS) specialize in handling delinquent receivables.
The image above showcases the homepage of SECS, a trusted third-party service that helps manage receivables using proven methods.
The easier it is for customers to pay, the faster you’ll get your money. Provide various payment methods like credit cards, ACH transfers, and online portals to remove any roadblocks to payment.
Good communication goes a long way in ensuring smooth payments. Maintain a positive relationship with clients, address any concerns quickly, and make it easy for them to reach out if there’s an issue.
Before offering credit, assess a new customer’s financial stability. Also, periodically review the creditworthiness of existing customers to reduce the risk of unpaid invoices.
Encourage customers to pay faster by offering small discounts for early payments. For example, a 2% discount for payments made within 10 days can motivate customers to settle their bills sooner.
Consider accounts receivable insurance to safeguard your business from customer defaults. This coverage can help minimize financial losses if a client fails to pay.
Managing accounts receivable effectively is essential for maintaining steady cash flow and overall financial stability. Since an account receivable increase is credit or debit is a common accounting concern, it’s important to remember that accounts receivable is a debit account, representing money owed to your business. Proper tracking, timely collections, and strategic management help companies avoid cash flow issues and financial strain.
If you need expert support in managing overdue accounts and optimizing receivables, SECS is the best to go with. They provide creditors and debt buyers with a reliable solution for handling accounts receivable, from delinquency to pre-legal collections.
Their advanced scoring system leverages data-driven tools to prioritize and optimize collections, ensuring businesses recover outstanding debts efficiently.
So why wait? Contact SECS to explore tailored solutions for your business!
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