![]() The fact that the customers will pay later is viewed as a separate transaction under accrual accounting (see Figure 4.6).įigure 4.6 Credit versus Cash On the left is a credit sale recorded under the cash basis of accounting. The reason the sale would be recorded is that, under accrual accounting, the business reports that it provided $500 worth of services to its customer. Under the accrual basis of accounting, this sale would be recorded in the financial statements at the time the services were provided, April 1. Under the cash basis of accounting, the revenue would not be recorded until May 16, when the cash was received. The sale is made on account, with the payment due 45 days later. For example, assume that in the next year of Chris’s landscaping business, on April 1, she provides $500 worth of services to one of her customers. Under the cash basis of accounting, a credit sale would not be recorded in the financial statements until the cash is received, under terms stipulated by the seller. ![]() It is considered two events that occur simultaneously (exchange of merchandise for cash).Ī credit sale, however, would be treated differently under each of these types of accounting. It makes sense because the customer received the merchandise and paid the business at the same time. Credit sales (not to be confused with credit card sales) allow the customer to take the merchandise but pay within a specified period of time, usually up to 45 days.Ī cash sale would be recorded in the financial statements under both the cash basis and accrual basis of accounting. Cash sales include checks and credit cards and are paid at the time of the sale. In some businesses, there are two ways the customers pay: cash and credit (also referred to as “on account”). Assume that a business sells $200 worth of merchandise. Two brief examples may help illustrate the difference between cash accounting and accrual accounting. Many coffee shops earn revenue through multiple revenue streams, including coffee and other specialty drinks, food items, gift cards, and merchandise. Or, better yet, make a trip to the local coffee shop and get a first-hand experience. Remember, revenues for the coffee shop are related to its primary purpose: selling coffee and related items. Identify items the coffee shop sells that would be classified as revenues. Just as earning wages from a business or summer job reflects the number of hours worked for a given rate of pay or payments from clients for services rendered, revenues (and the other terms) are used to indicate the dollar value of goods and services provided to customers for a given period of time. In accounting, revenue recognition involves recording sales or fees earned within the period earned. Just as the $1,400 revenues from a business made Chris’s checking account balance increase, revenues increase the value of a business. ![]() Likewise, when a business provides goods or services to customers for cash at the time of the service or in the future, the business classifies the amount(s) as revenue. It is the value Chris received in exchange for the services provided to her clients. In our current example, Chris’s landscaping business, the “revenue,” or the value of services performed, for the month of August would be $1,400. ![]() Revenue is the value of goods and services the organization sold or provided to customers for a given period of time. Next, let’s turn our attention to when we record transactions, as timing is key. You’ve learned the basics of each method as well as the accounting equation and double-entry accounting.
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