Question

In: Finance

What are the accounting differences between cash and receivables from the perspective of a buyer? A...

What are the accounting differences between cash and receivables from the perspective of a buyer? A seller? How does the accounting basis (cash vs. accrual) an organization chooses change these differences?

Solutions

Expert Solution

The timing of recording the transaction of sale and purchase is different for cash and receivables. Sales transaction which involves cash is recorded at the very moment when the cash is received. If the sales are on credit it will be recorded in receivables account as they have chances of going into bad debts if payment are not received on time to the seller.

From the buyer's perspective, if cash transaction takes place, that amount will immediately reduce the cash balance whereas the receivables doesn't effect the cash balance of the buyer.

From the seller's perspective, if the cash transaction takes place it will increase the revenue, but for the receivables revenues are recognized when the cash has been received.

Accounting basis for recording the cash and receivables transaction is revenue recogntion. If a sale takes place in march and payment to be received in May, then under the cash basis the seller recognizes the sale in May when the cash is received. Under the accrual basis, the seller recognizes the sale in March when the invoice is issued.


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