Finance Basics: Understanding Cash and Profit (B)
What is Customer Credit? What are Accounts Receivable?
Posted: Apr 2009
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UNDERSTANDING CASH AND PROFIT
Extending credit to customers is one method often used by businesses to help increase sales
The profit & loss statement records:
• what a company sells during a period, whether or not it is paid for in cash.
The cash flow statement records:
• only actual cash that moves in and out of the company.
The balance sheet records:
• The amount owed by customers - an asset called accounts receivable
The money owed by customers will enter the cash flow of the company in the period when the accounts are paid.
RETAINED EARNINGS AND PROFIT
Profit or loss made in previous periods and kept in the company
= Retained Earnings
Both retained earnings and profit/loss of the current period are recorded under liabilities on the balance sheet.
Lots of hungry children want to buy a sandwich, but don't have money with them.
JS can sell more, if the children are allowed to buy now and pay tomorrow, after getting the money from their parents. s
JS orders two boxes of sandwiches from fast food and keeps track of the credit given.
• The Profit & Loss Statement shows what is sold
• The Cash Flow Statement shows what is paid for in cash
Therefore: Profit/Loss does not equal to Cash Flow
• Credit extended to customers appears on the assets side of the balance sheet as accounts receivable
• Extending credit to customers squeezes cash flow
• The balance sheet shows retained earnings on the liabilities side
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