Industry
Part of Reading accounts receivable as a beginner bookkeeper: aging, payments and credit notes
Accounts receivable examples compared across one customer's ledger card
Accounts receivable examples worked through one customer ledger card: invoices, allocation, credit notes, deposits, short payments and the balance after each.
Every receivable entry is one of a small number of moves. The fastest way to learn them is to follow one customer through a few months and watch the balance after each one. Below is an invented customer, Harbour Print, on thirty day terms, followed from a clean start to the end of a quarter. Every figure is made up.
The question at each step is the same: what happened to the amount this customer owes us, and what else moved at the same time? Nothing else about receivables is harder than that.
What to take away
- Only two events change what a customer owes in the ordinary course: you invoice them (up) and they pay (down). Everything else is a correction, an advance, or a decision.
- The customer's balance is an asset, so every entry that moves it has a matching entry somewhere else: income, bank, a liability, or a cost.
- A running balance that you can explain line by line is the entire test of whether the account is right.
The ledger card
| Date | Event | Against the customer | Other side | Balance owed |
|---|---|---|---|---|
| 3 Jan | Invoice 1001 for 2,000 | +2,000 | Income 2,000 | 2,000 |
| 20 Jan | Invoice 1002 for 1,500 | +1,500 | Income 1,500 | 3,500 |
| 4 Feb | Payment 2,000 received, ref 1001 | (2,000) | Bank +2,000 | 1,500 |
| 12 Feb | Credit note against 1002 for 300 | (300) | Income (300) | 1,200 |
| 1 Mar | Deposit of 1,000 for a job not yet started | (1,000) | Bank +1,000 | 200 |
| 15 Mar | Invoice 1003 for 4,000 for that job | +4,000 | Income 4,000 | 4,200 |
| 20 Mar | Payment 1,150 received, ref 1002 | (1,150) | Bank +1,150 | 3,050 |
| 31 Mar | Contra: Harbour Print's own invoice to us, 250 | (250) | Supplier balance (250) | 2,800 |
Each row is walked through below.
1. Two invoices
Invoice 1001 on 3 January records 2,000 of income and 2,000 owed. No money has moved. Invoice 1002 does the same. After two invoices the customer owes 3,500 and the profit and loss statement shows 3,500 of sales, all in January, because January is when the work was done.
Two invoices, no cash yet
- 2,000Invoice 1001, 3 January
- 1,500Invoice 1002, 20 January
- 3,500Balance owed after both
- 3,500January sales on the P&L
The timing rule behind that is covered in the revenue recording guide. Whether it applies to your books depends on which method you keep them under, a choice the federal guide to accounting periods and methods describes.
2. A clean payment
On 4 February, 2,000 arrives with the reference 1001. The bank goes up, the customer's balance comes down, and income does not move because it was recorded in January. The payment is allocated to invoice 1001 specifically, not left as a lump against the customer, so the aged report now shows one open invoice, 1002, at 1,500.
Allocated payment vs bank feed lump
Correct: allocated to 1001
- Bank
- Up 2,000
- Customer balance
- Down 2,000
- Income
- No change
- Open invoices
- 1002 at 1,500
- Result
- Sale counted once
Error: booked as new income
- Bank
- Up 2,000
- Customer balance
- Unchanged
- Income
- Up 2,000 again
- Open invoices
- 1001 and 1002
- Result
- Sale doubled
The single most common receivables error happens here: recording the 2,000 as new income because it arrived as a deposit on the bank feed. That doubles the sale.
3. A credit note
Harbour Print disputes part of invoice 1002: a rush fee of 300 they say was not agreed. After a conversation, the studio agrees. A credit note for 300 is issued against 1002.
Credit note versus write-off
Credit note
- Income
- Down 300
- Amount owed
- Down 300
- Cost line
- None
- Reason
- Disputed charge
Write-off
- Income
- Stays at 7,200
- Amount owed
- Down 50
- Cost line
- Bad debt 50
- Reason
- Uncollectable
A credit note reverses part of the sale. Income comes down by 300 and so does the amount owed. Invoice 1002 now has 1,200 open against it. This is different from a write-off, where income stays and a bad debt cost appears; the distinction is drawn in the accounts receivable overview.
4. A deposit in advance
On 1 March the customer pays 1,000 up front for a large job that has not started. The bank goes up. The customer's balance goes down to 200, which now reads oddly: they owe 1,200 on invoice 1002 and we hold 1,000 of theirs.
Two ways to hold a 1,000 deposit
Simple: reduce receivable
- Bank
- Up 1,000
- Customer balance
- Down to 200
- Balance sheet
- Receivable 200
- Income now
- None
Stricter: liability
- Bank
- Up 1,000
- Customer balance
- Stays at 1,200
- Balance sheet
- Receivable 1,200, liability 1,000
- Income now
- None
Many small businesses leave it like that, tolerable for a few days. The stricter treatment records the 1,000 as a liability, money held against work owed, not a reduction of the receivable. Until the work is done, it is not the customer's payment of anything.
The ledger card above uses the simpler treatment so the balance can be followed. The point to hold onto is that the 1,000 is not income yet in either treatment.
5. The invoice the deposit was for
On 15 March the job is delivered and invoiced at 4,000. Income 4,000, owed 4,000. Now the deposit does its work: the 1,000 already held is applied against invoice 1003, leaving 3,000 open on it. The customer's balance is 4,200: 1,200 still open on 1002 and 3,000 on 1003.
Where the 4,200 balance sits
- 4,000Invoice 1003 on 15 March
- 1,000Deposit applied to 1003
- 3,000Still open on 1003
- 1,200Still open on 1002
If the deposit had been recorded as income on 1 March, the job would show 5,000 of sales for 4,000 of work.
6. A short payment
On 20 March, 1,150 arrives referenced to invoice 1002, which has 1,200 open. Fifty short. The payment is allocated to 1002 and 50 remains open on it.
What to do with a 50 short payment
Is the 50 explained by the customer?
allocate 1,150 and confirm the reason
allocate 1,150 and chase the 50
That 50 is a message, not a rounding error, and it could be a bank charge deducted, a further deduction the customer thinks they are entitled to, or a mistake. Find out which.
Writing it off without asking lets a pattern of short payments go unnoticed for a year. It is not a reason to leave the whole 1,150 unallocated.
7. A contra
Harbour Print also does printing for the studio and sent an invoice for 250 in March, recorded in the studio's payables. Both sides agree to net it. The studio's payable to Harbour Print falls by 250 and Harbour Print's balance as a customer falls by 250, with no cash moving.
Two rules. First, a contra needs a document both sides have agreed, because otherwise the customer chases an invoice you think is settled. Second, it is posted through both ledgers explicitly, not by quietly reducing one invoice. The other side of this entry is explained in the accounts payable guide.
The quarter end
Harbour Print owes 2,800 on 31 March: 50 on invoice 1002 and 2,750 on 1003 (4,000 less the 1,000 deposit less the 250 contra). Every part of that balance can be traced to a line above, which is the test.
On the balance sheet that 2,800 sits inside receivables. In the profit and loss statement the quarter shows 7,200 of income from this customer: 2,000 plus 1,500 less 300 plus 4,000. The cash received was 4,150.
The gap between those two figures, 7,200 earned and 4,150 collected, is what receivables exists to track. If you want the same idea taught from first principles rather than from a ledger card, the opening weeks of a university introduction to financial and managerial accounting build the whole subject on that one gap.
Things that did not happen, and what they would look like
Things that did not happen
- A write-off.If the 50 short payment turned out to be uncollectable, the entry is bad debt cost 50 and the customer balance down 50. Income stays at 7,200.
- An overpayment.If the customer had paid 1,250 against 1,200, the extra 50 is a liability owed back to them, sitting as a credit on their account until refunded or applied.
- A bounced payment.If the 2,000 on 4 February had been returned by the bank, the receipt is reversed: bank down 2,000, customer balance up 2,000, invoice 1001 open again. Never a new invoice.
