Explaining Complex Financial Data and Accounting Transactions
I'm writing to describe the current dilemma you are in regarding not having enough money to cover the company's payroll and pay vendors within 30 days, despite the fact that sales are consistently rising. This condition results from a variety of accounting activities that are recorded in different accounting categories, including the short-term balance sheet, cash accounts, accounts receivable, and accounts payable.
Receivables and Accounts Receivable
Receivables are both short term and long term debts owed to the company by customers. These monetary obligations are reported and recorded on the balance sheet as business assets. The likelihood of converting receivables into cash decreases as the account ages. When the company sells its products on credit, there will be an increase in receivables and no increase in cash because it is recorded in the books of accounts as revenue although money has not been received. Both cash and accounts receivables are business assets. However, receivables are not regarded as money until they are paid off (Weygandt, Kimmel & Kieso, 2015).
Accounts Payable
On the other hand, accounts payable refers to the accounting entry showing all the short term debts the company owes its vendors or creditors. On the balance sheet, accounts payable is recorded as the company's current liabilities. The account payable is credited when the company owes a bill, but when a debtor pays the bill, the accounts payable is debited. An increase in accounts payable increases cash balances but decreases net income of the business.
Impact on Cash Balances
When a company sells on credit, the accountant or a bookkeeper lists the unpaid balance in the customer's ledger account and the accounts receivables on the side of assets in the balance sheet. When the company owes some bills which are expenses that have not been settled, the unpaid balance is recorded in accounts payable on the side of liabilities in the balance sheet and the supplier's ledger account (Bobryshev, Uryadova, Lyubenkova, Yakovenko & Alekseeva, 2014). The two items, accounts payable and accounts receivables, are essential in calculating the sum of cash that has not been paid. The accounts receivable shows some sales that have not been paid in cash, whereas accounts payable indicates the total expenses that the company has not paid in cash. It is important to note that the balances on the accounts receivable and accounts payable are what matters and not the individual supplier and customer.
Managing Receivables and Payables
In this regard, you should put a lot of attention on how the receivables and the payables are recorded in the balance sheet daily to avoid any defaults or loss of cash in the company. You should encourage debtors to pay for the goods within the specified time to increase the cash balances of the business so that the amount of sales should correspond with the cash at hand available in the company.
Mr. Smith, I assure you that this problem will not be experienced again since I am committed to providing more vital information regarding sales, accounts receivable, accounts payable, and balance sheet. If you have any questions, please don't hesitate to call me at 754-8597. Thank you for your attention.
Sincerely,
Name
Managing Director
Aaron's Company Limited
References
Bobryshev, A. N., Uryadova, T. N., Lyubenkova, E. P., Yakovenko, V. S., & Alekseeva, O. A. (2014). Analytical and management approaches to modeling of the accounting balance sheet. Life Science Journal, 11(8), 502-506.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.
