How to Determine Cash Payments From Change in Accounts Receivable & Sales Revenue

Sales are paid for with cash or credit.

Cash payments for sales affect the cash, accounts receivable and sales revenue accounts. These payments occur when sales are paid with cash and when collections are received on credit sales. For cash sales, the cash payment is collected and recorded at the time of sale; sales revenue is also recorded at this time. For credit sales, the payments collected reduce the amount originally recorded to accounts receivable; sales revenue is not affected.

Instructions

1. Analyze your "Cash" account. Payments received for credit and cash sales are debited (increased) to the cash account. These debit amounts must have a corresponding credit (increase) to sales revenue or a credit (decrease) to accounts receivable. Other debits to cash that do not affect sales revenue or accounts receivable are not related to cash collections on sales.

2. Analyze your Accounts Receivable account. This asset account is used for credit sales. When payments are collected on credit sales, this account is credited (decreased). A corresponding debit is recorded to the cash account for the payment amount. All credits to accounts receivable reflect cash collections on credit sales.

3. Analyze your Sales Revenue account. This account is credited (increased) for credit and cash sales. When a cash sales occurs, cash is debited (increased). When a credit sale occurs, accounts receivable is debited (increased). All credits to sales revenues are for cash and credit sales. To identify the cash sale and payment, look for a corresponding debit to the cash account for the sales amount.

References

• "Financial: CPA Exam Review"; DeVry/Becker Educational Development Corp.; 2009

Resources

• Washburn University: Cash Collections and Cash Funds