One of the most crucial financial indications for any company that sells products or renders services on credit is the amount of accounts receivable. It indicates the sum of money that consumers owe the business for goods or services that have been delivered but have not yet been paid for. As with all asset accounts, Account Receivable is an asset account with a debit balance. In other words, when a business registers a sale on credit, it credits Revenue and debits Account Receivable.
Because Account Receivable is an asset account that grows when a business sells on credit, there is some uncertainty as to whether it is a credit or debit. An asset account is supposed to grow when there is a debit and shrink when there is a credit in accounting terminology. The Account Receivable and Revenue are increased by a debit when a corporation records a sale on credit, respectively. This results in a situation where an income account (Revenue) increases with a credit and an asset account (Account Receivable) increases with a debit.
A business needs an effective credit and collection policy to lower days in accounts receivable. This entails having a transparent credit application process, vetting clients for creditworthiness prior to issuing credit, and establishing transparent payment arrangements. Additionally, the business needs to keep an eye on how old its receivables are and follow up with clients who haven’t paid their bills on time. Offering discounts to clients who pay their invoices early is another tactic to decrease the number of days an account is past due. This can encourage clients to make on-time payments and enhance the company’s cash flow.
In conclusion, Account Receivable is a debit-balanced asset account. When a business registers a sale on credit, it climbs with a debit, and when the consumer pays, it reduces with a credit. A business must have an effective credit and collection policy, as well as keep track of the age of its receivables, in order to decrease days in accounts receivable. Providing discounts to clients that pay ahead of schedule might also aid the cash flow.