Managing Current Assets and Current Liabilities

One important area of business management and tax planning is revenue and expense recognition for tax and financial statement reporting purposes. How revenue and expenses are recognized depends on type and size of business, and company structure. For example, an non-profit or charity organization does not have the profit as the main objective.

The two options for recognizing revenues and expenses are cash basis and accrual basis. The cash basis is recognizing revenue when cash is received and expenses are paid. The accrual basis is recognizing revenue when income is earned and expenses are incurred. The cash basis is selected when at the time of sale cash is normally received for services. There is no credit extended to customers. There are a small number of expenditures or no goods or services are purchased on credit terms. This is a common method used for businesses in start-up phase.

The accrual basis or modified accrual basis is selected when credit terms are extended to customers and goods and services are purchased on credit. Usually,

small purchases are recognized as expenses when they are received and paid. An example of these purchases would be office supplies, delivery charges and petty cash items.

This is a good opportunity to briefly discuss accounts receivable, accounts payable and cash management. Accounts receivable are monies owed by customers for

goods or services received. Some important aspects of accounts receivable management are ensuring that customer billings are done on a daily or monthly basis, customer disputes are resolved in a timely manner, and cash received is deposited and recorded on a timely basis. There is an accounts receivable collection policy. These procedures will assist in having a smoother cash flow into the company.

Accounts payable are monies owed to suppliers for goods or services received. Some important aspects of accounts payable management are negotiating favorable credit terms with suppliers, goods or services are received as ordered, correct price and quantities are charged for goods or services, bills are recorded on a timely basis, supplier statements reconcile to company records, bill payment policy and procedures, and take advantage of sales discounts, etc. These procedures are simple ways to ensure that the business is paying for goods received at the correct price and when payments are due. The cash management is tying together the cash received and cash paid. It is good

practice to reconcile the bank account balance on a very timely basis. A spreadsheet is an excellent tool for a cash management schedule. The cash flow spreadsheet can be used to see where and when the money is coming in and how it is being spent. The current information can be used to determine how much and when money will be needed to project or plan future activities. An accurate income amount and amount paid in expenses will present a more accurate picture of current operations and result in better planning.

Iva Pederson