Journal entry for trade receivable

Introduction

Trade receivable is a type of the current asset on the balance sheet that represents the right to receive cash in the future. In this case, we usually make the journal entry for trade receivable when we make the credit sales as that is the time when such a right exists.

In accounting, the trade receivable is also known as the accounts receivable; hence these two terms of trade receivable and accounts receivable are usually interchangeable with one another. This is because the trade receivable and accounts receivable have the same nature as the current asset on the balance sheet and they both represent the right to receive the cash payment in the near future.

The right of receiving cash payment in this form of trade receivable usually exists when we sell the goods on credit or on account to our customers. Likewise, the journal entry for trade receivables usually contains the sales revenue account on the credit side. Additionally, if we use the perpetual inventory system, we also need to make another journal entry to record the cost of goods sold at the time of the sales.

Journal entry for trade receivable

We can make the journal entry for trade receivable in our business by debiting the trade receivable account and crediting the sales revenue account.

This journal entry for trade receivable will increase total assets on the balance sheet as a result of the increase in the receivable which is the right to receive the cash in the near future. At the same time, it will also increase total revenue on the income statement as a result of the sales that we have made.

Later, when we receive the cash payment from the customer for the credit sales that we have made, we can make the journal entry for trade receivable collection by debiting the cash account and crediting the trade receivable account.

This journal entry will eliminate the trade receivables that we have recorded previously. However, the total assets on the balance sheet will stay the same as the amount of trade receivable in this journal entry will be transferred to the cash account as both of them are asset accounts.

Trade receivable example

For example, on January 1, we make a sale of $5,000 of merchandise goods on credit to one of our customers. Later, on February 20, we receive the cash payment of $5,000 from our customer for this $5,000 credit sales that we made on January 1.

These $5,000 merchandise goods that we have sold had an original cost of $3,000 on the balance sheet. And we use the perpetual inventory system to manage and control the inventory goods in our business, in which we will update the balance of the inventory every time there is a movement of the inventory.

In this case, we can make the journal entry for trade receivable by debiting the $5,000 amount to the trade receivable account and crediting the same amount to the sales revenue account on January 1, for the $5,000 credit sale of merchandise goods, as below:

January 1:

This journal entry of trade receivables will increase both our total assets on the balance sheet and total revenues on the income statement by $5,000 as of January 1.

At the same time, because we use the perpetual inventory system, we also need to make the journal entry for the $3,000 cost of goods sold with the debit of the cost of goods sold account and the credit of the inventory account on January 1, as below:

January 1:

Later, on February 20, when we receive the $5,000 cash payment from the customer for the credit sales that we have made, we can make the journal entry to eliminate the $5,000 trade receivable as below: