Help understanding a financial movement as stated in accounting book

2

Please can someone help me understand what the following statement says a bit simpler,

‘A decrease in the allowance for receivables represents a reduction in an expense that does not relate to an inflow of cash from expenses but to an inflow of cash from sales.’

This relates to somehow an outflow of cash during the current accounting period but why?

Reply 1

MindMax2000

Universities Forum Helper

22

Original post by Pur3chris

Please can someone help me understand what the following statement says a bit simpler,

‘A decrease in the allowance for receivables represents a reduction in an expense that does not relate to an inflow of cash from expenses but to an inflow of cash from sales.’

This relates to somehow an outflow of cash during the current accounting period but why?

allowance for receivables is the money you expect to receive from sales, but has not yet arrived.
If it goes down, it means you are expecting less money to come from the sales e.g. fewer sales, bad debt, dodgy dealing (not a technical term), etc.
In terms of inflow from expenses: a) technically does not exist by definition unless you're talking about refunds b) allowances are estimates determined by the receiver of the money (debtor), not an actual expense c) the money doesn't go out to anywhere, so to say allowance for receivables represent an inflow of any sort doesn't make sense

This relates to somehow an outflow of cash during the current accounting period but why?
Have you done a cash flow statement? The statement might show a reduction of cash coming into the business, hence why the sentence was referring to decreases as opposed to actual expenses.
If there is a decrease in allowance in receivables, then the change is negative. You can think of it as a negative inflow of cash, but that's just confusing to the person marking your paper.

Reply 2

Pur3chris

OP

2

Original post by Pur3chris

Please can someone help me understand what the following statement says a bit simpler,

‘A decrease in the allowance for receivables represents a reduction in an expense that does not relate to an inflow of cash from expenses but to an inflow of cash from sales.’

This relates to somehow an outflow of cash during the current accounting period but why?

I’m still not quite understanding it sorry. Is there way of explaining it in an example for example, if things are credited or debited and accounts used etc. if that’s not an issue please?

Reply 3

Pur3chris

OP

2

Original post by MindMax2000

allowance for receivables is the money you expect to receive from sales, but has not yet arrived.
If it goes down, it means you are expecting less money to come from the sales e.g. fewer sales, bad debt, dodgy dealing (not a technical term), etc.
In terms of inflow from expenses: a) technically does not exist by definition unless you're talking about refunds b) allowances are estimates determined by the receiver of the money (debtor), not an actual expense c) the money doesn't go out to anywhere, so to say allowance for receivables represent an inflow of any sort doesn't make sense

This relates to somehow an outflow of cash during the current accounting period but why?
Have you done a cash flow statement? The statement might show a reduction of cash coming into the business, hence why the sentence was referring to decreases as opposed to actual expenses.
If there is a decrease in allowance in receivables, then the change is negative. You can think of it as a negative inflow of cash, but that's just confusing to the person marking your paper.

I’m trying to attach an image of the part of the book which details what the entries are trying to do in relation to the production of the cash flow statement. It’s not letting me attach images unfortunately

Reply 4

MindMax2000

Universities Forum Helper

22

Original post by Pur3chris

I’m still not quite understanding it sorry. Is there way of explaining it in an example for example, if things are credited or debited and accounts used etc. if that’s not an issue please?

I'd though introducing the double entry would complicate things. Oh well...

Accounts receivables DR
Sales CR

If accounts recievables goes down, so does sales.

Reply 5

MindMax2000

Universities Forum Helper

22

Original post by Pur3chris

I’m trying to attach an image of the part of the book which details what the entries are trying to do in relation to the production of the cash flow statement. It’s not letting me attach images unfortunately

See the following for an alternative explanation to the relation between cash flow statement and accounts receivables:
https://qxglobalgroup.com/accounts-receivable-and-its-impact-on-cash-flow-financial-modeling/

Reply 6

globalintegrauk

Original post by Pur3chris

Please can someone help me understand what the following statement says a bit simpler,

‘A decrease in the allowance for receivables represents a reduction in an expense that does not relate to an inflow of cash from expenses but to an inflow of cash from sales.’

This relates to somehow an outflow of cash during the current accounting period but why?

Explore the provided link for an alternative perspective on the connection between the cash flow statement and accounts receivables:
https://accounting-outsourcing-services-uk.blogspot.com/2024/01/maximizing-cash-flow-crucial-role-of.html

Reply 7

claris98

3

Original post by Pur3chris

Please can someone help me understand what the following statement says a bit simpler,
‘A decrease in the allowance for receivables represents a reduction in an expense that does not relate to an inflow of cash from expenses but to an inflow of cash from sales.’
This relates to somehow an outflow of cash during the current accounting period but why?

Okay, let me try to break down that statement in simpler terms: The key points are:

1.

A decrease in the "allowance for receivables" represents a reduction in an expense.

The "allowance for receivables" is an accounting estimate for the amount of customer accounts that a company expects will not be collected (bad debts). When this allowance decreases, it means the company is expecting to collect more of its outstanding customer invoices.

1.

This reduction in expense does not relate to an inflow of cash from expenses.

Typically, a decrease in an expense would result in more cash coming into the business. However, in this case, the decrease in the "allowance for receivables" expense is not directly tied to cash coming in from expenses.

1.

Instead, it relates to an inflow of cash from sales.

The decrease in the allowance means the company is expecting to collect more of its outstanding customer invoices (sales). This increased cash collection from sales is the reason for the reduction in the "allowance for receivables" expense. In summary, the statement is saying that a decrease in the "allowance for receivables" expense represents the company expecting to collect more of its outstanding customer invoices (sales), which increases the cash inflow, rather than the expense itself directly generating cash. The key point is that this decrease in an expense is indirectly related to increased cash collection from sales, not directly from the expense itself.

Reply 8

khawjakashif

2

Original post by Pur3chris

Please can someone help me understand what the following statement says a bit simpler,
‘A decrease in the allowance for receivables represents a reduction in an expense that does not relate to an inflow of cash from expenses but to an inflow of cash from sales.’
This relates to somehow an outflow of cash during the current accounting period but why?

Allowance of Receivables is a contra account. On one side Receivables are reduced and second effect is increase of Provision of Bad debt. Any decrease in this allowance will decrease expense but this is only a paper transaction. We are preparing financial statements at the end of the period and we make our best assessment for the bad debts occuring in next period which are related to the sales of the period of the financial period. Matching of costs with Revenue principle apply here. Means, bad debts will occur next year, but we foresee them and record in the current year before close of accounts.

Help understanding a financial movement as stated in accounting book

Quick Reply

Related discussions

Articles for you