Accounts Receivables Explained

The accrual basis of accounting was discussed in Chapter 4, Basis of Accounting. All transactions are recorded when they happen, not when money is transacted.

Many types of firms either extend credit, or the nature of their business is such that all work is billed during or following work is completed. A retail store generally accepts money, checks, and credit cards, and some may have \”house charge accounts\” where the business itself extends credit and accepts payment after the sale. Some service businesses, such as accountants and graphics designers, complete their service, but bills won't be sent till all the hours and costs are determined and totaled.

Accounts receivable are comprised of sales or services that are billed, although not collected. All receivables must be accounted for, regardless of what method of accounting is utilized, to reassure they are tracked and picked up. In manual systems, merely an alphabetical file or list of customers \’ accounts will serve.

If you use the increase method of accounting, your accounts receivable will be included on your fiscal reports. The sales, or income, will be recorded on the books when the sale is made, not when the cash is received. When the cash is received, it reduces the amount of the receivable from the customer.

When you use the accrual basis, you will give your accountant a list of receivables at the end of the accounting period you're preparing statements for (monthly, quarterly, yearly), and they are going to include the accounts receivable on your fiscal reports.

Many companies use the accrual foundation for their finance statements, but the cash basis for their business tax assessment if they qualify. This way, if the business is making money and has more receivables than payables, you will not be paying taxes on money that you have not yet collected.

If in doubt then talk to your qualified accountant today.

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