Bookkeeping for Small Businesses: Accounts Receivable

Posted on November 10, 2015

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The Impact of Accounts Receivable on Your Financial Outcomes

accounts receivableThere are many decisions that you make for your small business that can impact your bottom line. This is true in the area of accounts receivable, where there are a few options for how to record your revenue and income that can affect your cash flow.

There are different ways that accounts receivable can affect your net income, and that depends on the accounting convention that you choose. The account convention basically determines when you officially consider a transaction a sale. No matter which accounting convention you choose, funds are not available for use until the customer actually pays you.

Here are the two options for ways to treat accounts receivable and how it impacts your net income:

Cash Method: If you choose to use the cash method of accounting, each transaction is recorded as a sale when you are paid by the customer. Accounts receivable is not inflated by increasing your sales figures before the money is in your hand. The flip side is, if you incurred expenses like labor or materials that were used to provide the customer with a good or service, and those expenses are paid for immediately, you could impact your bottom line in the short term.

Accrual Method: When you choose the accrual method of accounting, you record your transaction as a sale, no matter when the customer actually pays. Accounts receivable amounts, which are transactions for which you have not yet been paid, are counted as sales as soon as the product or service has been delivered to the customer. This practice increases your net profit, but your net profit also reflects your expenses incurred as part of delivering the product or service to the customer.

Your net income is calculated by subtracting the operating expenses from the gross revenue. You can increase your net income by adding to the sales volume without increasing the connected expenses. Likewise, you can increase net income by decreasing the level of your expenses while maintaining a steady gross sales income. No matter which of the two accounting conventions you choose, or the payment arrangements you make with your customers, every sale will eventually be reflected as revenue.

Whether you choose the cash flow or accrual method of accounting, your accounts receivable affects your cash flow. You can’t spend money that you don’t have. Also, if you are using the accrual method and have taxes due on income or sales amounts, you need to watch how your cash flow is impacted by unpaid accounts receivable amounts.

Bookkeeping for small businesses seems like a straightforward affair, but there are important decisions that can significantly impact how your net income is reported and the health of your cash flow. Set up a consultation at AccuBiz with Bert Doerhoff, CPA, to learn more about how decisions you make can impact your net income and cash flow.

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Posted in: Bookkeeping