Question

how the basic principles of accounting relate to the analysis and presentation of accounts receivable?

Answer 1

One of the basic principles of accounting is revenue recognition principle. This indicates accounting of revenue – revenue could only be recognized if its required performance obligation is complete. Therefore, it doesn’t depend on receiving of cash – cash may be received immediately or receiving in future.

Receiving of cash in future date for which required performance obligation is met today by the supplier is an on-account selling. In such case “accounts receivable” is presented as debit and “revenue” becomes credit. Once the cash is received in future date such accounts receivable becomes credit and cash becomes debit. In this way accounts receivable is analyzed how the customers are responding in payments and what amount should be considered as bad debts.

Therefore, revenue recognition principle must be fulfilled before opening an accounts receivable account. Such basis principle is related here.