Expenses incurred on account increase the accounts receivable balance

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Crash Course in Accounting and Financial Statement Analysis, Second Edition by Matan Feldman, Arkady Libman

Changes in Accounts Receivable

Recall that net income (the last line on the income statement and the first line on the cash flow statement) captures revenues and expenses based on the accrual method of accounting. As such, credit sales, in addition to cash sales, may be recorded as revenues.

The sales generated on credit are recorded on the balance sheet as accounts receivable, while cash revenues are recorded on the balance sheet as cash.

I hope I explained well.

If accounts receivable increased from one year to the next, the implication is that more people paid on credit during the year, which represents a drain on cash for the company, as some of the revenues that came in during the year increased the accounts receivable balance instead of cash.

Conversely, if accounts receivable decreased from one year to the next, the implication is that those old accounts receivable were collected (i.e., credit sales were eventually converted into cash sales), representing cash inflow for the company.

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