To Determine Business Revenue and Receivables

In most businesses, what drive the balance sheet are sales and expenses. In other words, they cause the assets and liabilities in a business. One of the more complicated accounting items is the accounts receivable calculation.

As a hypothetical situation, imagine a business that offers all its customers a 30-day credit period, which is fairly common in transactions between businesses, (not transactions between a business and individual consumers).

An accounts receivable asset shows how much money customers who bought products on credit still owe the business. It’s a promise of cash that the business will receive. Basically, accounts receivable is the amount of uncollected sales revenue at the end of the accounting period. Cash does not increase until the business actually collects this money from its business customers.

However, the amount of money in accounts receivable is included in the total sales revenue for that same period. The business did make the sales, even if it hasn’t acquired all the money from those sales yet. Sales revenue, then isn’t equal to the amount of cash that the business accumulated.

To get actual cash flow, the accountant must subtract the amount of credit sales not collected from the sales revenue in cash. Then add in the amount of cash that was collected for the credit sales that were made in the preceding reporting period.

If the amount of credit sales a business made during the reporting period is greater than what was collected from customers, then the accounts receivable account increased over the period and the business has to subtract that difference from net income.

And when the amount they collected during the reporting period is greater than the credit sales made, it means that the accounts receivable decreased over the reporting period, and the accountant 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.

The Balance Sheet Tells Much About Your Business

A balance sheet is a quick picture of the financial condition of a business at a specific period in time. The activities of a business fall into two separate groups that are reported by an accountant. They are profit-making activities, which includes sales and expenses. This can also be referred to as operating activities.

There are also financing and investing activities that include securing money from debt and equity sources of capital, returning capital to these sources, making distributions from profit to the business owners, making investments in assets and eventually disposing of the assets in the manner best suited to meet regulatory guidelines.

Profit making activities are reported in the income statement; financing and investing activities are found in the statement of cash flows. In other words, two different financial statements are prepared for the two different types of transactions. The statement of cash flows also reports the cash increases or decreases from profit during the year as opposed to the amount of profit that is reported in the income statement.

The balance sheet is different from the income and cash flow statements which report, as it says, incoming of cash and outgoing cash. The balance sheet represents the balances – or amounts – of a company’s assets, liabilities and owners’ equity at an instant in time. The word balance has different meanings at different times.

Balance, as it is used in the term balance sheet, refers to the balance of the two opposite sides of a business, total assets on one side and total liabilities on the other. However, the balance of an account, such as the asset, liability, revenue and expense accounts, refers to the amount in the account after recording increases and decreases in the account, just like the balance in your checking account.

Accountants can prepare a balance sheet any time that a manager requests it. But they’re generally prepared at the end of each month, quarter and year. It’s always prepared at the close of business on the last day of the profit period. It can also be prepared quarterly, as a matter of course; and it is usually prepared in conjunction with a profit and loss statement.