Meaning of Accounts Receivables
Account receivables are the amount of money due to enterprise for goods or services delivered to customers but not yet paid by them. It refers to the outstanding invoices the enterprise has or the customers owe the enterprise.
It represents a line of credit extended by enterprise and normally has terms that require payments due within a relatively short time, and within a year. Most businesses operate a portion of the sales to be on credit.
Businesses offer such a line of credit to regular and special customers. This avoids a sort of convenience to the customers and hassle of making the payment each time is avoided.
Accounts Receivables and Cash Flows
Every business must record all its payables and receivables to measure the company’s cash flows. Accounts receivables are part of “Cash In” vs accounts payable which equates to “Cash Out”. Account receivables arise owing to the customer.
If the business is a supplier, it already has its own cash-flow considerations and sets how long it is willing to receive the payment from the customer. For supplier i.e. the business, letting a customer wait for a little while before paying is called an account receivable.
These short-term credits are called current assets on the balance sheet and have an inverse impact on cash flows as accounts payable.
For example, the business has made a sale of $100,000 in 50% credit and 50% cash, receivable within months from sale.
The amount of $50,000 received in cash sales would be directly recorded as sales over here and it is a cash inflow to the business.
Rest $50,000 when received will be cash inflow to the business. If that amount is received next year, the cash inflow will incur next year only that is in the year of receipt.
Accounts Receivables and its recording
The double entry system of bookkeeping states that for every debit there is credit. So, if credit sales is made, accounts receivable will be debited while sales as income will be credited. In this transaction, there is no movement of cash.
Using the accrual concept of accounting, accounts receivables have increased and sales i.e. net profit has also increased respectively.
The starting point of the cash flow statement is Net Profit and it has been increased due to transactions that did not involve cash.
However, transactions not involving cash flows do not work for the cash flow statement. Thus, the business deducts any net profit i.e. sales indirectly that do not involve cash movements.
On the other hand, an increase in accounts receivables has to be deducted from Net Profit in order to move from the accrual concept of accounting to Cash Used from operations.
Presentation in Financial Statement:
Income Statement: The corresponding amount equivalent to accounts receivables are recorded as sales.
Balance Sheet: The amount due from the customer is called accounts receivables. It is popularly called Trade Receivables and it is a current asset.
Cash Flow Statement: The increase in accounts receivables is deducted from Net Profit and the decrease in accounts receivables is added to Net Profit
Presentation in Cash Flow Statement:
When a cash account or bank account is debited against accounts receivables, then only the accounts receivable impact the cash movement.
Then this movement has to be recorded in a cash flow statement to show the impact on the cash. In the following format, accounts receivables have been presented in the cash flow statement prepared using the indirect method.
|Year ended March 31||2019|
|Cash Flows from Operating Activities|
|Net Profit (Loss)||XXX|
|Add: Loss from discontinued operations||XX|
|Add: Non-cash items||XX|
|Add/Less: Change in Assets and Liabilities|
|Increase in Accounts Receivables||(XX)|
|Increase in Accounts Payable||XX|
|NET CASH FLOWS FROM OPERATING ACTIVITIES||XXX|