Income statement and cash flow statement are two of the four basic financial statements. One details a business's revenues and expenses in one period, while the other details its cash flows, or changes in its cash and cash equivalents. Revenues and expenses can include non-cash-based transactions, such as sales made on credit. In contrast, cash flows are recorded -- not surprisingly -- on a cash basis. Because the writing off of uncollectible accounts receivable does not change cash and cash equivalents, it does not impact the cash flow statement.
Sales on Credit
Most accounting is done on an accrual or related accounting basis. As such, non-cash-based transactions can be recorded as having occurred under these accounting bases so long as certain conditions are met. For example, if a business made a sale of $200 on credit to a customer who does not pay until a month later, that business is free to record the sale as long as no reasonable doubts exist concerning that customer's ability to pay. Under these circumstances, the sale is recorded as an increase to sale and a corresponding increase to the business's accounts receivable.
If a business made a sale in cash, that would be counted on the cash flow statement because the business received an influx of cash. Such an occurrence is called a cash inflow, much as the expenditure of cash and cash equivalents is called a cash outflow. If a business makes a sale on credit, that sale has no impact on cash flow until the cash is collected.
Sales made on credit are recorded under accrual-basis accounting so long as their source transactions are complete and the sums are deemed collectible. Such assessments can be wrong and the relevant accounts deemed uncollectible. In those cases, the uncollectible accounts are either written off directly as being worthless or counted against an allowance made for uncollectible accounts. In either case, no change in cash and cash equivalents occurs.
Uncollectible Accounts and the Cash Flow Statement
Uncollectible accounts being written off as bad debt expense have no impact on cash flow statements except in the most indirect manner. Net cash flow, or the total resultant change in cash and cash equivalents, is calculated using either the direct or indirect method. Direct method simply lists all changes in cash and cash equivalents and then adds them up to produce net cash flow. In contrast, indirect method uses net income as a starting point and deducts non-cash-based revenues and expenses before adding non-income cash-based transactions to produce net cash flow. Because the change in accounts receivable from period's beginning to its end is deducted from net income in the process of calculating net cash flow under the indirect method and writing off uncollectible accounts changes the amount of accounts receivable, writing off uncollectible accounts can have some small impact in one method of calculating net cash flow.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.