Receivables and Revenue

Accounts receivable are the uncollected sales revenue at the end of the accounting period. Cash does not increase until the company collects it from its business customers. If a company's credit sales during the reporting period exceeded what it collected, the accounts receivable account increased over the period.

In most businesses, sales and expenses drive the balance sheet. In other words, they generate a company's assets and liabilities. Accounts receivable are one of the more complicated accounting items. As an example, consider a company that offers all of its customers a 30-day credit period, which is fairly common in business-to-business transactions (not transactions between a business and individual consumers).

An accounts receivable asset indicates how much money customers who purchased products on credit still owe the company. It is a case promise that the company will receive. Accounts receivable are the uncollected sales revenue at the end of the accounting period. Cash does not increase until the company collects it from its business customers. The amount of money in accounts receivable, on the other hand, is included in the total sales revenue for the same period. The company did make sales, even if it hasn't yet received all of the proceeds. The amount of cash accumulated by the business is not equal to the amount of sales revenue.

To calculate actual cash flow, the accountant must deduct the amount of credit sales not collected from the cash sales revenue. Then add the amount of cash collected for credit sales made during the previous reporting period. If a company's credit sales during the reporting period exceeded what it collected from customers, the accounts receivable account increased over the period, and the difference must be deducted from net income.

If the amount collected during the reporting period is greater than the credit sales made, the accounts receivable decreased during the reporting period, and the accountant must add the difference between the receivables at the beginning of the reporting period and the receivables at the end of the same period to net income.