 Accrual Accounting
Hi
When we prepare a profit and loss statement, we are doing so in the accrual accounting sense - meaning that we are accruing our receipts and disbursements at the time they become assets or liabilities (or changes in the nature of the assets). For example, we may sell products and give our customers 30-day terms. Hence, we'll show that the sales are made in January (i.e. our accounts receivable asset increases) even though the actual payment may not be received until February. Similarly, we may make purchases on credit. To make matters more complicated, we may have to buy 100 units of inventory even though we only plan to ship 10 units in month #1, 15 units in month #2, and so on. In this case we show the "cost of goods" in the month that the sale of these same goods was made that's why we call it "cost of goods sold". Later on, we'll show how these accounting figures are translated into actual cash flows.
Thanks |