![]() The earning of revenues takes place when goods have been delivered or services have been substantially completed. The revenue recognition principle governs the timing of revenues and provides for revenues to be recorded in the period in which those revenues are earned, not necessarily when cash is collected from customers. ![]() ![]() Accrual basis accounting is comprised of the revenue recognition principle and the matching principle. The method of accounting that must be used to account for the timing of revenues and expenses under GAAP. See also Days sales in accounts receivable The calculation and comparison of a company's accounts receivable turnover with that of other comparable companies in the same industry can be helpful in evaluating a company's quality of management. Tight credit policies, on the other hand, may negatively affect the volume of a company's sales and resulting profits. Lax credit policies can improve sales volume, but may cause an increase in the costs associated with collecting accounts receivable and the ultimate cost of uncollectible accounts. The management of a company's credit policies and collections of accounts receivable can have a significant impact on a company's profits. The average balance of accounts receivable is typically calculated by adding the beginning and ending balances and dividing the sum by two. The ratio is determined by dividing net credit sales revenues for the year by the average outstanding balance of accounts receivable during the year. Accounts receivable turnover refers specifically to the average number of times during the year that the average balance of accounts receivable is created through credit sales and then collected. See also Credit sales, Purchases on account and Credit policiesĪ ratio often used in financial statement analysis to measure a company's performance in the management of its customer credit policies and collections of accounts receivable. The term "account" is also used the context of business transactions involving extensions of credit. Double-entry accounting also requires that equal debit and credit totals be recorded with each and every company transaction. Under the rules of double-entry accounting, debit entries always record increases in asset, expense and dividend accounts while credit entries always record increases in liability, owners' equity and revenue accounts. Prior to introduction of computerized accounting systems, manually-maintained accounts appeared in a "T" format with increasing or decreasing entries recorded on the left-hand side (always referred to as " debit entries") or right-hand side (always referred to as " credit entries") of the T-account. See also Nominal accounts and Real accounts All of a company's accounts taken as a whole constitute a file referred to as the company's general ledger. For example, a transaction affecting a company's cash will be recorded and then posted to the cash account to reflect the increase or decrease in cash and update its running balance. A company's transactions are originally recorded through journal entries and then posted to the specific accounts affected. Accounts are used to summarize the affects of a company's transactions on each of its assets, liabilities and categories of owners' equity. A written or electronic record maintained for each of a company's assets, liabilities and categories of owner's equity, including revenues, expenses and dividends.
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