According to one study, 82% of businesses fail because they can’t manage their cash flow.
If you want to make sure that your business isn’t part of that statistic, you’ll need to learn the difference between accounts receivable debit or credit.
Thankfully, we’re here to help you out. If you want to learn the difference, make sure you keep reading!
What Are Accounts Receivable?
Account receivables are cash inflows. If you have accounts receivable, that means that these transactions will be what your customers owe you for your products or services that they have bought with credit.
In general, a credit will mean a liability, and debit will mean an asset.
That means that if you are trying to decide if it should be credit or debit, you should probably list it as debit but also have it be visible on your credit side.
So if you sell something on a credit, you’ll create a transaction in your ledger and make an invoice. You’ll then send that invoice to your customer who has to pay it according to your terms. Most transactions will have a limit of thirty days.
Start in 2018, the IFRS 15 outlined some rules that you’ll need to follow when it comes to your account receivables. These rules said that your credit or debit could be recognized as revenue if it meets certain requirements.
Debit vs Credit
A debit is anything that will increase your asset, like cash. It could also be an expense account, like your utility expense. In most accounts, this will be listed on the left side of your entries.
On the other hand, credit is a transaction that increases your liability. This could be something like loans, or equity accounts like capital. These are normally listed on the right-hand side of your entries.
Another example of credit could be your payroll funding. To learn more about that, check out this link: yourfundingtree.com.
How Does it Work?
So how do these accounts work? The first step will be to sell goods or services with credit.
Since you will receive the money but don’t have it yet, you should record the pending payment as a credit.
Create the Invoice
Once the customer has actually bought something, you’ll have to send them a professional invoice. This invoice will list what products they bought. It should also list the quantities and prices so there is no confusion.
You can send them this invoice either after or before the products are delivered. This will depend on what kind of sales contract you have with them.
The invoice should also have a date, billing information, customer information, the amount due, the payment terms, and taxes, fees, or discounts, and your contact information.
Once you’ve sent the invoice, you may have to wait thirty days before your customer sends the payment over.
However, each customer should always pay the cost before the due date. When they do, you’ll have to record the payment in your journal. You’ll need to then debit that cash to show there was an increase in your cash flow.
On the credit side, you’ll have to reduce the amount that the customer owed to you.
How to Ensure You Get Paid
So what happens if a customer just doesn’t want to pay you? Before you take legal action, there are actually a few steps you could take to prevent that.
First, you may want to implement a process of charging customers fees if your payments are overdue. You could also try rewarding customers who pay faster with some discounts or coupon codes.
You should also invest in some kind of system that will send the customer notifications for any payments that they have pending. This system should also keep track of all of your invoices so that you can stay organized as well.
If none of that works, you may want to hire a collections agency. This agency will take care of contacting everyone that owes you money and working to get them to pay you back.
After you take these steps and still don’t have your money, then you can start pursuing legal action.
How to Handle Advance Payments
Some businesses require customers to make an advance payment. This could also just be a down payment before the rest of the money is charged.
This is popular in an industry like the telecom industry where people are purchasing prepaid cards. In this case, you won’t need an invoice to keep track of what you’re owed.
Instead, when you receive that payment, you’ll send an invoice (or receipt) later to remind the customer of what they paid for.
So in your own book, your account receivable figure will be negative because you already received the money during a fixed time. Instead, you’d list this as a credit because it would be connected to the services related to creditors.
However, if you have part of the payment upfront and then the rest after your invoice, you’d list the first half as a credit and then the other payment as a debit.
Learn More About Accounts Receivable Debit or Credit
These are only a few things to know about accounts receivable debit or credit, but there are many more things to keep in mind!
We know that running a business can be stressful and overwhelming, but we’re here to help you out.
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