Revenue and Receivables in Accounting Perspective

In almost all businesses, the two things that make up a balance sheet are sales and expenses. Sales and expenses constitute the business’s assets and liabilities. An inevitable and yet one of the more complicated items in business accounting is the accounts receivable.

To get a view of what an accounts receivable is, picture this as an example: A customers avails of a product or service that a business offers for credit purchase which is payable in thirty days. The business then expects that the customer shall pay what it is accountable to, which is the product or service availed of after the thirty-day period. That is what an accounts receivable is about. This shows cash that the business expects to receive for a product or service that is sold to a customer on credit. Simply put, accounts receivable is uncollected sales revenue at the end of the accounting period. Increase in the business’s cash flow does not happen until it is able to collect the due amount from its customers. However, the amount in accounts receivable is added as a part of the total sales revenue for that same period. Even when the business has still not collected the customer’s payable amount, it is still considered as part of sales. In other words, sales revenue may not be equal to the actual amount of cash that the business has earned for a particular period.

In getting the actual cash flow, the accountant subtracts the credit sales amount that was not collected from the cash sales revenue. Then, the accountant adds in the cash amount that was collected for the credit sales, which were incurred in the previous reporting period. If the business finds that the credit sales amount made during the reporting period is greater than its collection from customers, then the records for accounts receivable has increased over the period. In this case, the business has to subtract the difference from the net income.

If, however, collected amount is greater that credit sales that was incurred during the reporting period, then the accounts receivable is considered to have decreased over the said reporting period. The accountant must then add net income and the difference. The difference is derived by subtracting the beginning accounts receivable and the ending accounts receivable at the same reporting period.

The accountant must be very careful in performing these accounting procedures to ensure that the reports presented will be accurate as well as to avoid discrepancies.