In all of these cases the credit goes to Notes Receivable. In cases 1 and 3, the asset increased, viz., Cash, is debited; and in case 2 the liability canceled or decreased is debited. It may be stated, however, that in cases 2 and 3, instead of making the credit direct to the asset account Notes Receivable, it is better carried to a supplementary account, Notes Receivable Discounted, in order to show the liability arising from the fact that, through our indorsement, we guarantee to pay the note at its maturity in case the maker fails to do so. This is later explained in detail.
Accounts with Customers
| (Name of Customer) | |
| Debit: | Credit: |
| (1) For amount he owes us at beginning. | (a) For money he pays us on account. |
| (2) For goods we sell him on account. | (b) For notes he gives us us on account. |
| (c) For goods he returns to us. | |
| (d) For discounts we give him. | |
| (e) For claims we allow him. | |
The balance owing us by a customer is an asset, and therefore a debit item.
Goods sold on account are charged to the customer because our claim against him constitutes an asset; at the same time the income account, Sales, is credited.
When a customer pays us on account, his account is credited and Cash is debited, showing an increase of the asset Cash and a decrease of the asset Accounts Receivable. Such an entry is simply a transfer from one account to another, an increase of one asset offset by a decrease of another asset.
When a customer gives us his note, his account is credited and Notes Receivable is debited, usually, with the face of the note.
When a customer returns goods to us, he is credited to decrease the original charge to his account and Sales or Returned Sales is debited to reduce the income originally credited to Sales. It is not necessary to make any other record of the returned goods, because, as was explained in [Chapter VI], no day-to-day record is kept to show the decrease of the asset Merchandise through Sales. So, when goods are returned by a customer, the increase of the asset Merchandise will be shown at the end of the fiscal period when the merchandise inventory is taken, and no other record than that indicated is necessary.
When a customer is allowed a discount for the early payment of his bill, he is credited to reduce the original charge by the amount of the discount, and some temporary proprietorship account, as Discount on Sales, is debited to show the decrease in proprietorship resulting from the allowance of the discount.
When a customer is allowed a claim for reduction in his bill on account of damaged goods or the like, the entry is similar to the one next above—debit Claims and Allowances and credit the customer.