The Daily Technical #04

Good morning. Welcome to the fourth edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Do accounts receivable get captured on the income statement?

Start by noting that accounts receivable doesn’t appear directly on the income statement but affects how revenue is recognized. Under accrual accounting, revenue is recorded when earned, regardless of whether cash has been received. So, even though there’s no specific line for accounts receivable, it’s indirectly captured in the revenue figure.

To get the full picture, turn to the balance sheet, which shows the actual accounts receivable balance, and the cash flow statement, which reconciles revenue with cash collected. For example, if a company sells $10,000 but only collects $7,000, all $10,000 is recognized as revenue, with the remaining $3,000 recorded as accounts receivable on the balance sheet.

In short, accounts receivable influences revenue on the income statement, but you need the other financial statements to fully track its impact.

Common Mistakes:

1. Thinking AR shows up directly on the income statement
   It’s easy to think there’s a specific accounts receivable line on the income statement, but that’s not the case. Remember, AR affects revenue recognition, but it isn’t listed as its own line item.

2. Ignoring other financial statements
   Focusing only on the income statement misses the bigger picture. You need to check both the balance sheet for the actual AR balance and the cash flow statement for how cash flows in (or doesn’t) from that revenue.

3. Confusing cash-based vs. accrual accounting
   Some might assume revenue on the income statement means cash was received. Not true! Accrual accounting recognizes revenue when earned, not when paid. Be sure to differentiate between revenue recognition and cash collection.

TL;DR:

• Accounts receivable doesn’t directly appear on the income statement, but it impacts revenue under accrual accounting.

• Use the balance sheet to find the AR balance and the cash flow statement to reconcile revenue with actual cash collected.

• Focus on accrual vs. cash accounting to avoid confusion when answering questions about revenue recognition.

TODAY’S QUESTION
How do you calculate retained earnings for the current period?

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