Accounts Receivable Basics

💰 Accounts Receivable Basics: The Money Your Friends Owe You!

🎬 The Story Begins: The Lemonade Stand

Imagine you have a lemonade stand. Your best friend Emma comes by, but she forgot her wallet. She says, “Can I pay you tomorrow?” You trust Emma, so you give her the lemonade anyway.

Guess what? You just created an Account Receivable!

That’s all it is—money someone promises to pay you later.

🍋 What is Accounts Receivable?

Accounts Receivable (AR) = Money customers owe you for stuff you already gave them.

Think of it like a “You Owe Me” jar. Every time you sell something but don’t get cash right away, you drop a little note in the jar saying “Emma owes me $5.”

graph TD
    A["You Sell Lemonade"] --> B{Did they pay now?}
    B -->|Yes| C["💵 Cash in Hand"]
    B -->|No| D["📝 Accounts Receivable"]
    D --> E["They pay later"]
    E --> C

Real Life Examples:

• 🏪 A store lets you buy now, pay later
• 📱 Your phone company bills you at the end of the month
• 🏥 A doctor’s office bills your insurance

Why it matters: AR is an asset—it’s money coming TO you!

📝 Recording Credit Sales: Writing It Down

When you sell something and let someone pay later, you need to write it down properly. This is called recording a credit sale.

The Simple Version

Imagine your notebook has two columns:

• Left side (Debit): What you’re getting
• Right side (Credit): What you’re giving

When Emma buys $5 lemonade on credit:

You’re getting a promise to pay ($5 in AR), and you’re giving lemonade (which counts as earning $5 in sales).

📖 The Journal Entry

Accounts Receivable    $5
    Sales Revenue          $5

Read it like this: “Accounts Receivable goes UP by $5, and Sales goes UP by $5.”

Another Example:

Your lemonade stand sells $100 worth of lemonade to a local café. They’ll pay in 30 days.

Accounts Receivable    $100
    Sales Revenue           $100

That’s it! You recorded a credit sale. The café owes you $100, and you earned $100 in sales.

🏷️ Sales Discounts: Early Bird Gets a Deal!

Sometimes you want customers to pay faster. So you offer a discount if they pay early.

The Discount Deal

Imagine telling Emma: “Pay me within 10 days, and I’ll give you 10% off!”

This is written as 2/10, n/30 (a common business shorthand):

• 2 = 2% discount
• 10 = if paid within 10 days
• n/30 = otherwise, full amount due in 30 days

Example Time!

You sell $100 of lemonade. Terms: 2/10, n/30.

If they pay within 10 days:

• Discount = $100 × 2% = $2
• They pay = $100 - $2 = $98

graph TD
    A["Sale: $100"] --> B{Pay within 10 days?}
    B -->|Yes| C["Pay $98<br>Save $2!"]
    B -->|No| D["Pay full $100<br>in 30 days"]

Recording the Discount

When they pay early with the discount:

Cash                      $98
Sales Discounts           $2
    Accounts Receivable       $100

What happened?

• You got $98 cash
• $2 is the discount (this reduces your total sales)
• The $100 they owed is now cleared

Sales Discounts is called a contra-revenue account—it reduces your sales total.

🔄 Sales Returns and Allowances: Oops, Take It Back!

Sometimes things go wrong:

• The lemonade was sour 🍋😖
• They ordered 10 cups but only wanted 5
• The product was damaged

When this happens, you either:

1. Take it back (Return)
2. Give them money off (Allowance)

Sales Returns

Emma bought $20 of lemonade, but $5 worth was too sour. She returns it.

Sales Returns and Allowances    $5
    Accounts Receivable             $5

What happened?

• Your sales go down by $5
• They owe you $5 less now

Sales Allowances

Same situation, but Emma keeps the sour lemonade. You say, “I’ll knock $3 off your bill.”

Sales Returns and Allowances    $3
    Accounts Receivable             $3

Same idea! You’re reducing what they owe because of the problem.

Why One Account for Both?

Both returns and allowances reduce sales, so businesses lump them together in one account called Sales Returns and Allowances.

graph TD
    A["Problem with Sale"] --> B{What does<br>customer want?}
    B -->|Give it back| C["Sales Return"]
    B -->|Keep it, want discount| D["Sales Allowance"]
    C --> E["Sales Returns&lt;br&gt;and Allowances"]
    D --> E

🧮 Net Sales: The Real Money You Made

After all the discounts, returns, and allowances, how much did you actually make?

That’s your Net Sales!

The Magic Formula

Net Sales = Gross Sales - Sales Discounts - Sales Returns and Allowances

Or think of it as:

🍋 Total Lemonade Sold
  - 🏷️ Discounts Given
  - 🔄 Returns & Allowances
  ─────────────────────────
  = 💰 Net Sales (Real Money Made)

Big Example!

Your lemonade stand had a busy month:

• Gross Sales: $1,000 (total lemonade sold)
• Sales Discounts: $50 (customers paid early)
• Returns/Allowances: $30 (sour lemonade issues)

Net Sales = $1,000 - $50 - $30 = $920

You actually earned $920 in real sales!

graph TD
    A["Gross Sales<br>$1,000"] --> B["Minus Discounts<br>-$50"]
    B --> C["Minus Returns<br>-$30"]
    C --> D["Net Sales<br>$920 🎉"]

Why Net Sales Matters

Net Sales shows the true picture of your business:

• Gross Sales might look impressive ($1,000!)
• But Net Sales is the real amount you get to keep ($920)

Investors, banks, and business owners all want to know your Net Sales because it’s the honest number.

🎯 Quick Recap: The Whole Picture

Let’s trace the full journey of a sale:

graph TD
    A["1. Make a Sale<br>on Credit"] --> B["Record:<br>AR ↑ Sales ↑"]
    B --> C{Customer Pays}
    C -->|Early with Discount| D["Record Discount<br>Cash + Discount = AR"]
    C -->|On Time, Full Amount| E["Record Payment<br>Cash = AR"]
    C -->|Problem? Return/Allowance| F["Reduce AR<br>and Sales"]
    D --> G["Calculate Net Sales"]
    E --> G
    F --> G

The Key Players:

🌟 You Did It!

You now understand how businesses track money that customers owe them. Here’s what you learned:

1. ✅ Accounts Receivable = “You Owe Me” money
2. ✅ Recording Credit Sales = Writing down who owes what
3. ✅ Sales Discounts = Rewards for paying early
4. ✅ Returns & Allowances = Fixes for problems
5. ✅ Net Sales = The real money you made

Remember the lemonade stand! Whether it’s a tiny stand or a huge company, the process is exactly the same. You’re just tracking promises, payments, and adjustments.

Now go forth and track those receivables like a pro! 🍋💰