I did a lot of payable and receivable accrual logic in this template designed to produce financial statements from a transaction log. It comes up in many businesses and if you want to optimize your cash conversion cycle as well as keep good records, it is important to track your receivables and payables on the financial statements.
You may also find this AR / AP tracker helpful.
Here are some general examples of the types of transactions that requiring the entry of accounts receivable or accounts payable:
Accounts Receivable:
Accounts Receivable refers to the amount of money that is owed to a company by its customers for goods or services sold on credit. The accrual journal entry for accounts receivable is:
When a sale is made on credit:
- Debit: Accounts Receivable
- Credit: Sales Revenue
When a customer makes a partial payment:
- Debit: Cash (or Bank Account)
- Credit: Accounts Receivable
When a customer pays the full amount owed:
- Debit: Cash (or Bank Account)
- Credit: Accounts Receivable
- Debit: Bad Debt Expense
- Credit: Allowance for Doubtful Accounts
- Debit: Allowance for Doubtful Accounts
- Credit: Accounts Receivable
- Debit: Cash (or Bank Account)
- Credit: Notes Receivable (if a note is issued)
- Credit: Accounts Receivable (if no note is issued)
- Debit: Accounts Receivable
- Credit: Revenue
Accounts Payable:
Accounts Payable refers to the amount of money that a company owes to its suppliers for goods or services purchased on credit. The accrual journal entry for accounts payable is:
When a purchase is made on credit:
- Debit: Purchases
- Credit: Accounts Payable
When a payment is made to a supplier:
- Debit: Accounts Payable
- Credit: Cash (or Bank Account)
When a discount is taken for early payment:
- Debit: Accounts Payable
- Debit: Discount (if any)
- Credit: Cash (or Bank Account)
- Debit: Expense Account
- Credit: Accounts Payable
- Debit: Accounts Payable
- Credit: Purchase Returns and Allowances
- Debit: Purchases
- Debit: Sales Tax Payable
- Credit: Accounts Payable
- Debit: Accounts Payable
- Credit: Cash (or Bank Account)
Note that the above journal entries are based on the accrual accounting method, which recognizes revenue and expenses when they are incurred, not necessarily when cash is received or paid out.
What Companies Are Required to Use Accrual Accounting?
A company is generally required to use accrual accounting if it meets certain criteria or if it is required by law. Here are some situations where a company has to use accrual accounting:
- Publicly traded companies: Companies that have shares listed on a stock exchange are required to use accrual accounting under Generally Accepted Accounting Principles (GAAP) in the United States.
- Large companies: Companies that exceed certain size or revenue thresholds may also be required to use accrual accounting. For example, in the United States, companies with over $25 million in annual revenue are generally required to use accrual accounting under GAAP.
- Tax requirements: Some countries require companies to use accrual accounting for tax purposes. For example, in the United States, businesses with gross receipts of $25 million or more are generally required to use accrual accounting for tax reporting.
- Industry standards: Certain industries may require companies to use accrual accounting. For example, construction companies and long-term contracts are required to use the percentage of completion method of accounting, which is an accrual accounting method.
