Accounting For Dummies®, 4th Edition

4.3. Getting Particular about Assets and Liabilities

The sales and expense activities of a business involve inflows and outflows of cash, as I'm sure you know. What you may not know, however, is that the profit-making process also involves four other basic operating assets and three basic types of operating liabilities. Each of the following sections explains one of these operating assets and liabilities. This gives you a more realistic picture of what's involved in making profit.

4.3.1. Making sales on credit → Accounts receivable asset

Many businesses allow their customers to buy their products or services on credit. They use an asset account called accounts receivable to record the total amount owed to the business by its customers who have made purchases "on the cuff" and haven't paid yet. In most cases, a business doesn't collect all its receivables by the end of the year, especially for credit sales that occur in the last weeks of the year. It records the sales revenue and the cost of goods sold expense for these sales as soon as a sale is completed and products are delivered to the customers. This is one feature of the accrual basis of accounting, which records revenue when sales are made and records expenses when these costs are incurred. When sales are made on credit, the accounts receivable asset account is increased; later, when cash is received from the customer, cash is increased and the accounts receivable account is decreased. Collecting the cash is the follow-up ...