Assets and Liabilities

 Assets and Liabilities

Accounts receivable is the total amount owed to the business by customers who have not yet paid. Receiving money from a customer increases the cash account and decreases the receivables account. Businesses make a profit by selling their products at a price sufficient to cover production costs, operating costs, interest on loans, and income taxes.

Making a profit in a company derives from different disciplines. Business, like your personal life, is based on trust, so it can get a little complicated. Many companies sell their products to customers on credit. Accountants use an asset account called accounts receivable to record the total amount owed to the business by customers who have not yet paid their balance in full. In many cases, companies do not fully collect their accounts receivable by the end of the fiscal year. This is especially true for credit sales that may be settled towards the end of the accounting period. 

Accountants record the turnover and cost of goods sold for those sales in the year in which the sales were made and the product was delivered to the customer. This is called accrual accounting, where revenue is recognized when sales occur and expenses are recognized when they occur. For credit sales, your accounts receivable will increase. Receiving money from a customer increases the cash account and decreases the receivables account.

Cost of goods sold is he one of the major expenses of a business that sells goods, products, or services. Services also have associated costs. It is exactly what the word means, the cost a company pays for the product it sells to its customers. Businesses make a profit by selling their products at a price sufficient to cover production costs, operating costs, interest on loans, and income taxes, leaving money for profits.

When a company purchases a product, the cost goes into the so-called inventory asset account. Expenses are either deducted from the cash account or added to the accounts payable account, depending on whether the company paid in cash or on credit.