Introduction
In accounting, an account is a record of the changes in an asset, liability, equity, revenue, expense, or dividend over a period of time. Accounts are the building blocks of the financial reporting system, providing the details that make up the balance sheet and income statement.
For Canadian businesses, understanding account types and how they are classified is essential for bookkeeping, software setup, and corporate tax filing with the CRA.
What Is Accounts Receivable?
Accounts Receivable (A/R) is an asset account that tracks money owed to a business by its customers. When goods or services are sold on credit, the amount due is recorded in Accounts Receivable until the customer pays.
A/R is classified as a current asset, since most receivables are collected within 12 months.
It appears on the balance sheet and is essential for cash‑flow management, invoicing, and accurate financial reporting.
Accounts Receivable Definition in Accounting
Accounts Receivable represents the legal claim a business has against customers who have been invoiced but have not yet paid.
This account increases when credit sales occur and decreases when customers pay their invoices.
Examples of How Accounts Receivable Works
Below are two common situations:
- When a sale is made on credit
- When the customer pays the invoice
Each example includes the debits and credits to show how A/R changes.
1. When a Credit Sale Occurs
Scenario:
A business performs $2,500 of services for a client and sends an invoice due in 30 days.
Journal Entry — Credit Sale
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $2,500 | |
| Service Revenue | $2,500 |
What’s happening?
- A/R increases → debit Accounts Receivable
- Revenue increases → credit Service Revenue
The business now shows a claim of $2,500 owed by the customer.
2. When the Customer Pays the Invoice
Scenario:
The customer pays the $2,500 invoice in full.
Journal Entry — Cash Receipt
| Account | Debit | Credit |
|---|---|---|
| Cash / Bank | $2,500 | |
| Accounts Receivable | $2,500 |
What’s happening?
- Cash increases → debit Cash/Bank
- A/R decreases → credit Accounts Receivable
The receivable is now settled.
Where Accounts Receivable Fits in the Chart of Accounts
Most accounting systems (QuickBooks, Sage, Xero, etc.) use a typical numbering structure:
- 1000–1999: Assets
- 1050–1099: Receivables (commonly used)
- Example: 1060 – Accounts Receivable
This helps organize current assets and improves reporting consistency.
CRA and GIFI Codes for Accounts Receivable
When filing a T2 corporate return, the CRA requires businesses to categorize accounts using GIFI codes.
- GIFI Code for Accounts Receivable: 1060
Using standardized codes allows the CRA to process financial statements quickly and accurately.
Accounts Receivable and the Accounting Equation
The accounting equation is:
Assets = Liabilities + Equity
When a credit sale occurs:
- Assets increase (A/R increases)
- Equity increases (revenue increases)
When the customer pays:
- One asset increases (cash)
- Another decreases (A/R)
The equation stays balanced at all times.
Internal Resources
- What Is an Account?
- The T‑ACCOUNT DEALER Rule
- Accounting Equation Explained
- Understanding Accounts Payable
Key Takeaway
Accounts Receivable is a key asset account used to record money owed to a business by its customers.
It increases when credit sales occur and decreases when payments are received. Proper recording of A/R is essential for monitoring cash flow, preparing accurate financial statements, and meeting CRA reporting standards.
