Accounting – 7.2 Accounting policies | e-Consult

Answer:

The credit sale method recognizes revenue when the goods are delivered to the customer, even if payment is not received immediately. This has the following effects:

Income Statement:

Revenue is recognised in the period when the goods are delivered, regardless of when the cash is received. This means that the income statement reflects the revenue earned, even if the cash hasn't been collected. This can lead to a difference between the revenue recognised and the cash received in the same period.

Statement of Financial Position:

Accounts receivable (money owed to the business by customers) are recorded as an asset in the statement of financial position. These accounts receivable represent the money the business is entitled to receive in the future. The amount of accounts receivable will increase with each credit sale and decrease as customers pay their invoices. The value of accounts receivable is an important indicator of the business's ability to collect its debts.

Timing Considerations:

• Revenue Recognition: Occurs when the goods are delivered.
• Accounts Receivable Recording: Occurs when the credit sale is made.
• Cash Receipt Recording: Occurs when the customer pays the invoice.