CHAPTER 7: ACCOUNTING, RECORDS, AND ASSOCIATED REGULATIONS
When the invoice is paid, the accounting entry is:
Debit: Cash Credit: Accounts receivable
Note that when the cash is entered, it has the effect of reversing the accounts receivable entry.
If the cash came in with the order and accounts receivable was not involved with the entry, it would bypass accounts receivable entries and look like this:
Debit: Cash Credit: Income Account
Here are some debit and credit rules to follow:
Debit accounts receivable: Adds an outstanding invoice to the financial records. Credit accounts receivable: Reduces the receivable when the invoice is paid or a credit memo is issued. Debit cash: Increases cash when an invoice is paid. Credit income: Increases the revenue account when an invoice is sent or un-invoiced cash is deposited.
ACCRUAL VS. CASH ACCOUNTING There are two general methods available for a company to maintain its financial records:
(1) accrual basis, or (2) cash basis. This refers to the timing of when revenue and expenses are recorded in the books.
Accrual Basis: Accrual accounting measures the performance and financial position of a company by recognizing events regardless of when cash transactions occur. The idea behind accrual accounting is to recognize events by matching the revenue the company has earned to the expenses it has incurred during a fiscal period—referred to as the matching principle. Consequently, if the company has shipped products or performed billable services but the customer has not yet been billed for the delivery by the end of the month, then the sales value should be accrued as revenue in the fiscal period in which the goods were delivered or services performed. The accrual method of accounting gives a more accurate picture of a company’s current financial condition.
Accrual accounting is considered to be the standard accounting practice for most companies, with the exception of very small operations.
Cash Basis: If a company uses the cash basis of accounting for its financial statements, then only transactions where cash is received or cash is paid during a fiscal period will result in the transaction being recorded in the financial statements as revenue or expense, respectively (example: retail).
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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