Understanding Key Accounting Terms: Cash, Receivables, and Inventory
Understanding Key Accounting Terms
Cash and Cash Management
Availability: Those assets of the entity that stand out for their immediate liquidity, i.e., they are means of payment.
Cash (Box): Used to record the movement of funds done with paper money or currency in circulation or current checks. The use of this account depends on the level of the company:
- Small business: cash payments made and deposited in banks.
- Medium and large companies: the cash is deposited in the bank, and check payments are made. Smaller payments are made through a fixed fund or petty cash.
Cash Count
The cash count is the analysis of cash transactions during a given period to check if all cash received has been accounted for. Therefore, the balance of this account corresponds with what cash is physically in cash, checks, or vouchers. It also serves to determine whether internal controls are being properly implemented.
Often, in the cash counts, missing amounts or surpluses appear compared to the control account ledger. These differences are generally recorded in an account called “cash differences.” The missing amounts are recorded as losses, and the excess is recorded as income. If these differences are not addressed by year-end, the account “Differences in Box” must be canceled against that of “Income.”
Deposit Receipts: Represents the checks received as payment for certain operations. These checks are to be received until the deposit and the deadline established legal accreditation by the clearinghouse.
Bank Reconciliation
The bank reconciliation is a process to confront and reconcile the values that the company has registered in a savings or checking account with the bank values supplied by the bank statement.
Fixed Fund (Petty Cash)
Represents funds that the company intended to meet expenses.
Fixed Fund Characteristics:
- Assign a specific sum to meet payments to be made in cash.
- Make payments in cash using funds allocated for this purpose.
- Replenish the amounts used by issuing a check. After that, the fixed cash amount will be promptly reassigned.
Accounts Receivable (Credits)
Credits represent the right to have money from an outside party or delay payment of amounts due for a certain period in exchange for interest. Representing the rights of third parties have the economic entity, which have the characteristic of being able to become effective, on time.
Classification of Receivables
- Trade receivables: Receivables comprise short-term debts arising from sales of goods or services to customers.
- Other Credits: They represent the rights to short-term receivables for the company that result from operations other than turning the business.
Inventories
Those goods intended for sale in the ordinary course of business of the entity or are in the process of production for such sale.
Stock Assessment Procedure
- FIFO (First-In, First-Out): This simply means that the items that were purchased primarily by the company are sold first.
- Advantages: Ending inventory is valued at the last purchase price. The cost of inventories sold is valued at the cost of the initial purchases. The cost recognized in the income statement is lower than that recognized by other valuation methods.
- Disadvantages: The utility has a greater impact on higher taxes. In an inflationary economy, it may have an exaggerated value, and purchasing costs faced old with current sales prices.
- Weighted Average: Take the average of all costs for items purchased within a period.
- Advantages: Easily applied. In an inflationary economy, it presents a reasonable profit as past and present average costs.
- Disadvantages: Not allowed to carry detailed control of the cost of incoming and outgoing goods.
- Precise Identification: The costing is done according to precisely identifying the items that were sold.
- Advantages: Lets you know exactly what is sold.
- Disadvantages: Needs a good computer system that works entirely online.
Inventory Difference
CMV (Cost of Merchandise Sold): EI (Beginning Inventory) + C (Purchases) – EF (Ending Inventory)