Accounting Procedures For Cash Received
A company makes sales in order to earn profits. In some cases cash may be received by the company at the time of making sales. However, in case of credit sales,cash is generally received by the company after a certain period of time.
It is important for a company to ensure that all cash related transactions are recorded in the books of accounts in a timely manner in order to maintain a constant check on the cash flow position of the company.
It is quite possible that a company may earn huge amount of profits, but its balance sheet may show an adverse cash position. Such a situation may arise in case of any delay in collection of money from company’s customers.
Another reason can be blockage of funds in company’s inventory. All these factors can have a substantial impact on a company’s cash position.Cash ledger is one of the most important ledgers in business accounting.It represents the amount of cash balance at the end of the relevant period.
Cash ledger is required to be updated on a continuous basis in order to ensure that cash balance appearing in the balance sheet represents the actual amount of cash available with the company.
Understand The Types Of Accounting Procedures For Cash Received
Cash Sales
Many companies prefer to make sales on cash basis.When goods are sold on cash basis, money is received immediately by the company. Cash sales results in an increase in the cash balance of the company. For Instance, a company’s cash balance on 1st June 2011 is $ 50,000.
In case company has made cash sales of $ 25,000 during the month of June 2011, company’s closing cash balance on 30th June 2011 will be $ 75,000. This increase in cash balance is because cash was received by the company at the time of making sales.
Credit Sales
In case goods are sold on credit basis, cash is not received immediately by the company.As a result company’s cash balance remains at a constant level (assuming no cash related transaction has occurred) till the time money is received from the customer.
When goods are sold on credit, company is required to create another asset (accounts receivables) in its balance sheet. When money is received from the customer, accounts receivables balance is reduced and company’s cash balance is increased. Let us understand the treatment of credit sales with the help of an example.
A company has sold goods worth $ 50,000 on credit to one of its customers on 15th June 2011. As a result company will have to report $ 50,000 in its balance sheet as accounts receivables.
If money is received from the customer on 15th July 2011 and company’s cash balance at the beginning of June 2011 was $ 10,000, company’s cash balance will continue to remain at $ 10,000 at the end of June 2011.
However, company’s cash account will be credited with an amount of $ 50,000 on 15th July 2011 which will increase its cash balance to $ 60,000. Since entire amount of money due from the customer has been received by the company, its accounts receivables will reduce to zero.