A business records transactions to show how its resources, obligations and performance change. Keeping receipts and payments separate from revenue and expenses is especially important when using accrual accounting.
Sales and customer receipts
A sale on credit can create revenue and an account receivable when the applicable recognition conditions are met. When the customer later pays, the receipt increases cash and reduces that receivable; it does not create a second sale. Cash-basis and accrual-basis records use different timing rules.
Purchases and supplier payments
A purchase may create an expense, inventory or another asset depending on its nature. A credit purchase also creates an amount owed to the supplier. Paying that balance later reduces cash and the payable. The payment and the expense should not automatically be treated as the same event.
Financing and owner transactions
Receiving loan funds increases cash and a liability. Repaying loan principal reduces that liability rather than creating an operating expense. Interest is considered separately. Owner contributions and distributions also need their own classification rather than being mixed into sales or routine operating costs.
Profit, loss and cash
Profit compares recognized income and expenses for a period. Cash measures available money and its movement. A company can report profit while waiting for customers to pay, or hold cash supplied by borrowing while operations make a loss.
Maintain the recording process
Attach supporting documents, use a consistent chart of accounts and reconcile the records. Double-entry bookkeeping records equal debits and credits for each transaction, but a balanced entry can still use the wrong account. Review classification as well as arithmetic.
An accountant can help establish the appropriate reporting basis and treatment of unusual transactions. Managers should use the resulting statements together and ask what each balance represents before using it to make a decision.