Find Out the Difference Between Assets and Liabilities and How Your Bookeeper Records Them

Revenues and Receivables

In a good number of organizations, what drives the balance sheet are revenue and costs. In other words, they're the assets and liabilities of the company. Making real money in a company comes from several diverse areas. It can get just a little complex as just like in our private life, commerce is run on credit. A lot of establishments sell their products to their prospects on credit. Bookkeepers use an asset account referred to as accounts receivable to record the full total due to the firm by its clients who haven't paid the balance in full yet. Much of the time, an organization hasn't collected its receivables in full by the end of the financial year, especially for sales that are made near the end of the accounting period.

Your bookkeeper records the sales revenue and the cost of goods sold for these sales in the year during which the sales were made and the goods delivered. This is called accrual accounting, that records income when sales are made and records expenses when they're incurred. When sales are made on credit, the accounts receivable asset account is increased. When cash is received from the client, then the cash account is increased and the accounts receivable account is decreased.

The cost of merchandise sold is without doubt one of the main expenditures of businesses that sell wares, products or services. A company makes its profit by selling its products at prices high enough to cover the cost of manufacturing them, the costs of running the company, the interest on any capital they've borrowed and income taxes, and a margin for profit.

When the business acquires products, the cost of them goes into what's referred to as an inventory asset account. The cost is deducted out of your cash account, or added to the accounts payable liability account, based on whether the organization has paid with cash or credit.

An accounts receivable asset shows what money customers who bought products on credit still owe the organization. It is an assumption of cash that the organization will receive. In essence, accounts receivable is the amount of uncollected sales revenue at the end of the accounting period. Cash won't increase until the company in fact collects this money from its organization customers. However, the amount of cash in accounts receivable is included in the total sales revenue for that same period. The company did make the sales, even though it hasn't obtained all the cash from the sales yet. Sales revenue, then isn't equal to the amount of cash that the firm accumulated.

To get real cash flow, the bookkeeper must subtract the amount of credit sales not collected from the sales revenue in cash. Next add in the amount of cash which was collected for the credit sales that were made in the preceding reporting period. If the total amount of credit sales a company made during the reporting period is greater than what was collected from customers, then the accounts receivable account increased over the period and the company has to subtract from net income that difference.

If the amount they collected during the reporting period is greater than the credit sales made, then the accounts receivable decreased over the reporting period, and the bookkeeper needs to add to net income that difference between the receivables at the beginning of the reporting period and the receivables at the end of the same period.