When charge customers pay cash to apply against their accounts, the amount is recorded:

Whether you're managing customer accounts valued at $10,000 or $10,000,000, maintaining accurate records is critical. Accounts payable and accounts receivable are the lifeblood of your organization, and one misplaced decimal point or one missed entry can skew your records something awful. Properly classifying payments also is critical, so that your accounting ledgers are reconcilable at month- and year-end.

Tip

"Paid on account" is a partial payment for goods or services that is not matched to a specific invoice.

What is Paid On Account?

Sometimes, you may choose to make a payment for an amount due but you haven't received a bill from the supplier yet, making the payment difficult to reconcile. Similarly, you might receive a payment from a customer before you have issued him with an invoice. These payments and receipts are known as "payments on account." They are common in industries where credit is used for purchasing goods, and payments are made in drips or varying amounts over time.

"Paid on Account" for Accounts Receivable

Accounts receivable – not to be confused with receivables, which can include money you expect from sources other than customer sales – is the money customers owe your company for providing goods or services. Depending on the financial arrangements with each customer, the accounts receivable might give them a finite period of time to make installments, such as 18 months for large purchases. Or the sales agreement might be for the entire amount owed, to be payable within one payment for a shorter period, such as 30 days from the invoice date. Because accounts receivable are monies owed to you by customers, they are considered company assets.

When a customer submits a payment on an account, your bookkeeper makes a journal entry of the amount and the transaction is considered "paid on account." This simply means the customer has made a payment – which goes in the accounts receivable ledger – on the full amount owed. For example, you sell pallet of paper to a printing shop, and the total price is $5,000. If the printing shop sends your company a payment for $2,500, the bookkeeper enters that as "paid on account." And if the print shop sends payment for the full $5,000, your bookkeeper will still enter it as "paid on account," but will also note that the account is "paid in full."

"Paid on Account" for Accounts Payable

When you owe another company for goods or services, your account with the vendor is among your accounts payable, or money your company owes. Accounts payable are considered liabilities. When your bookkeeper makes a payment on your account, he makes a journal entry as a debit from your company bank account and a credit in your accounts payable ledger. Once you pay the full amount due, your account is paid in full.

You have effectively reduced your liability when you pay on account, and when the account is paid in full, the liability is gone. That said, your payment on account also reduces your assets, because the payment reduces your cash on hand, or bank balance.

Tip

It's a good practice to track "paid on account" entries, and the time between payments from your customers. This way, you can track your receivables and determine whether the money owed to your company is reaching the stage where it is likely to become noncollectable because of age. Accounts receivable can be difficult to collect as they age.

When looking at an account in the general ledger, the following is the debit or credit balance you would normally find in the account:

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Revenues and Gains Are Usually Credited

Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest Income), and Gain on Sale of Assets. These accounts normally have credit balances that are increased with a credit entry. In a T-account, their balances will be on the right side.

The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales Discounts—these accounts have debit balances because they are reductions to sales. Accounts with balances that are the opposite of the normal balance are called contra accounts; hence contra revenue accounts will have debit balances.

Let's illustrate revenue accounts by assuming your company performed a service and was immediately paid the full amount of $50 for the service. The debits and credits are presented in the following general journal format:

Whenever cash is received, the asset account Cash is debited and another account will need to be credited. Since the service was performed at the same time as the cash was received, the revenue account Service Revenues is credited, thus increasing its account balance.

Let's illustrate how revenues are recorded when a company performs a service on credit (i.e., the company allows the client to pay for the service at a later date, such as 30 days from the date of the invoice). At the time the service is performed the revenues are considered to have been earned and they are recorded in the revenue account Service Revenues with a credit. The other account involved, however, cannot be the asset Cash since cash was not received. The account to be debited is the asset account Accounts Receivable. Assuming the amount of the service performed is $400, the entry in general journal form is:

Accounts Receivable is an asset account and is increased with a debit; Service Revenues is increased with a credit.

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Expenses and Losses are Usually Debited

Expenses normally have debit balances that are increased with a debit entry. Since expenses are usually increasing, think "debit" when expenses are incurred. (We credit expenses only to reduce them, adjust them, or to close the expense accounts.) Examples of expense accounts include Salaries Expense, Wages Expense, Rent Expense, Supplies Expense, and Interest Expense. In a T-account, their balances will be on the left side.

To illustrate an expense let's assume that on June 1 your company paid $800 to the landlord for the June rent. The debits and credits are shown in the following journal entry:

Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited. If the payment was made on June 1 for a future month (for example, July) the debit would go to the asset account Prepaid Rent.

As a second example of an expense, let's assume that your hourly paid employees work the last week in the year but will not be paid until the first week of the next year. At the end of the year, the company makes an entry to record the amount the employees earned but have not been paid. Assuming the employees earned $1,900 during the last week of the year, the entry in general journal form is:

As noted earlier, expenses are almost always debited, so we debit Wages Expense, increasing its account balance. Since your company did not yet pay its employees, the Cash account is not credited, instead, the credit is recorded in the liability account Wages Payable. A credit to a liability account increases its credit balance.

To help you get more comfortable with debits and credits in accounting and bookkeeping, memorize the following tip:

Here's a Tip

To increase an expense account, debit the account.

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Permanent and Temporary Accounts

Asset, liability, and most owner/stockholder equity accounts are referred to as permanent accounts (or real accounts). Permanent accounts are not closed at the end of the accounting year; their balances are automatically carried forward to the next accounting year.

Temporary accounts (or nominal accounts) include all of the revenue accounts, expense accounts, the owner's drawing account, and the income summary account. Generally speaking, the balances in temporary accounts increase throughout the accounting year. At the end of the accounting year the balances will be transferred to the owner's capital account or to a corporation's retained earnings account.

Because the balances in the temporary accounts are transferred out of their respective accounts at the end of the accounting year, each temporary account will have a zero balance when the next accounting year begins. This means that the new accounting year starts with no revenue amounts, no expense amounts, and no amount in the drawing account.

By having many revenue accounts and a huge number of expense accounts, a company will be able to report detailed information on revenues and expenses throughout the year.

When a payment is made on account how is the transaction recorded?

Is a cash payment recorded as a debit or credit?

How do you record collection of cash from customers?

Where should the receipt of cash from customers in payment of their accounts be recorded?