The Basics of Cash Receipts and Cash Disbursements
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The Basics of Cash Receipts and Cash Disbursements

Cash receipts, sometimes called cash inflow, or simply receipts is the amount of cash that an entity acquires for a certain time period. Cash disbursements, sometimes called cash outflow, or simply disbursements or payments is the amount of money that a company parts with. Cash disbursements are cash outlays of an entity. Given the double entry system, should cash receipts equal cash disbursements?

When accounting for receipts and disbursements, we should always remember that for every value received, there is normally a value that is parted with. Let us take for instance JL Company, a dealer of second hand cars. Assume the following transactions were incurred by JL Company for the current year:

  1. JL purchased a second hand car at a cost of $2,000. JL Company paid cash in full.
  2. JL Company sold the car purchased in transaction 1 for $3,000 to UCU Enterprises. UCU Enterprises paid cash to JL Company in full.

In the first transaction, JL Company parted with its $2,000 in order to receive a second hand car. This transaction resulted in a cash disbursement of $2,000.

  • Value Received: 2nd hand car.
  • Value parted with: $2,000 cash.

Journal entry: 

Inventory   $2,000  
     Cash     $2,000

Take note that the 2nd hand car received in the first transaction is not considered as a cash receipt. It would be reported as a current asset in the Statement of Financial Position. Furthermore, the 2nd hand car is considered as inventory of JL Company because it is intended to be sold within the normal operating cycle.

In the second transaction, JL Company received cash of $3,000 but parted with the 2nd hand car. This transaction resulted in a cash receipt of $3,000.

  • Value Received: $3,000 cash
  • Value parted with: 2nd hand car

Journal Entry

Cash 3,000  
      Inventory   3,000

Take note that the car that was sold to UCU enterprises is not considered as a cash disbursement. It would be considered as a decrease in the inventory of JL Company.

Cash Inflow   $3,000
Cash Outflow   2,000
Net Cash Flow   $1,000

As presented above, JL company has a positive net cash flow of $1,000. This means that because of the two transactions, the cash of JL Company increased by $1,000. We could therefore conclude that receipts and payments normally do not equal each other. If ever the cash receipts and cash payments are equal, there would be no increase or decrease in the cash balance of an entity. If the cash receipts is less than the cash disbursements, there would be a negative cash flow thus resulting in a decrease in the cash balance of the entity. If the cash receipts is higher than the cash disbursements as given in the above example, there would be a positive net cash flow thus increasing the cash balance of the firm.

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