Recording A Business’s Assets and Liabilities

It is any business’s aim to generate more profit and constantly achieve positive figures in their income statement. Profit fuels a business. And the more that a business earns profit, the more it will be good for the business, the economy and the society as a whole. Generating profit may not be a simple step for most businesses. The business environment is so fickle that a company should keep up with competition, market trends and consumer behavior. Due this, many businesses sell their products or services on credit terms.

In recording sales made through credit, accountants use an asset account known as accounts receivable. By definition, accounts receivable is a current asset that is a result of selling a product or service on credit or on account. Usually, invoice terms are used to signify that there was credit sales transaction and not a cash sale. More often, a business will not have collected its receivables in full by the end of the fiscal year, especially for credit sales that were made near the end of the accounting period.

The accountant lists the sales revenue and the cost of goods sold for credit sales and product shipments to customers that were made in a particular year. This type of accounting procedure is what is known as accrual based accounting. Accrual accounting, by definition, is a method wherein revenues are recognized in the income statement when they are earned instead of when they are received. At the time of revenue, the balance sheet may also be affected by either an increase in cash or accounts receivable or a decrease in unearned revenues.

Under accrual based accounting, expenses are matched with revenues on the income statement when the expenses expire instead of when these are paid. At the time the expense was made, the balance sheet can be affected at the time if there is a decrease in cash or prepaid expense or an increase in accounts payable.

The accounts receivable account is increased for sales made on credit. It is decreased if cash is received from the customer. Meanwhile, the cost of goods sold is one of the huge expenses of a business that sells goods and services. To earn profit and recover from such expense, a business usually sells its products at prices higher cost. When a company acquires products, the cost of such is recorded in the inventory asset account. Depending on whether the business has paid the product in cash or credit, the said cost will b be subtracted from the cash account or added to the accounts payable liability account.