Received Cash from Customers: Why Accounts Receivable & not RE
I've been practicing my Balance Sheets and accounting, but I can't seem to wrap my head around the logic behind placing "cash from customers" in the accounts receivable row instead of the retained earnings row. Wouldn't cash from customers be a positive liquid earning --> Current Asset --> Cash up ; and wouldn't it then be balanced by RE going up? Why would it be in accounts receivable when its received already?
Thanks for your time!
On your image below, you have two transactions:
1. "Inventory sold on credit." I would say that that is Debit AR and Credit Revenue, which ultimately flows through RE and Equity, which is what you have.
2. "Received cash from customers." This is the ambiguous one. This transaction occurs first in the sequence, but it is unknown when it chronologically occurred, so you have two possible interpretations:
Interpretation A: These are separate customers from Transaction 1. If so, Debit Cash and credit Revenue, which goes to RE and Equity, which is what you have.
Interpretation B, which I suspect is what they want: These are the SAME customers as Transaction 1. If this is true, then you Debit Cash and Credit AR to write off the amount you collected.
If Interpretation B is correct, then I think this is a bit of a stupid problem because they ought to have listed "Received cash from customers" after "Inventory sold on credit" or otherwise made it clear that either "all customers buy on credit first before paying cash" or "received cash from customers who previously bought items on credit."
I think that really makes sense, thank you very much. Been trying to wrap my head around it, this really gives me another lens to look from.
Cheers!
Your understanding in your post was more or less correct, the only thing I added was that the cycle is:
1. Debit AR, Credit Revenue (sale on credit)
2. Roll-off the AR to Cash with Debit Cash, Credit AR (finish the sale by getting cash and taking off the receivable, as there is nothing else in the future to receive)
Where'd you get this sheet? Looks like some really good practice.
looks like financialedge training modules given to SA
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