Cash receipts take place when a company receives a cash payment from the sale of a product. The company may receive cash in various forms, including credit card charges, personal checks, business checks, ACH bank or wire transfers and cashier's checks or money orders.
Cash receipts are any form of cash received by a business, such as customer payments (via credit card, personal check, cash, business check, money order, wire transfer or bank ACH), proceeds from the sale of nonoperating assets, interest income, capital gains or dividends paid out from investments or royalties.
Receiving and Recording Cash
The Cash Cycle
Heading Off Fraud
Accountants often mention internal controls, and these important guidelines act as safety measures to prevent fraud when it comes to cash receipts and disbursements. Companies that lack proper internal controls may find an employee using company checks to pay his personal bills or making out wire transfers to himself.
To ensure that cash disbursements have adequate safeguards that prevent fraud, it's important for companies to segregate duties so that the same person who authorizes or signs a check or wire transfer does not have the ability to do other parts of the transaction, such as creating the check or initiating the wire transfer.
For smaller companies, this may be difficult because of a small staff, and it helps to access bank statements before any other company staff does, to review each transaction and check copy, looking for anything that appears unusual, and then follow up with the bank if needed.
Reviewing authorized check signers is an important step, and this person should not have any access to blank checks or any ability to enter transactions into the company accounting system. Using a signature stamp for checks can create additional problems because it's often very easy for someone to steal the stamp and also steal a stack of blank checks.
Some companies have their checks require two signatures, usually with some type of a dollar threshold so that smaller check amounts can be used with just one signature. This allows for a certain degree of segregation of duties when issuing checks over a certain threshold amount. Don't forget about wire transfers, as they have become more popular in recent years.
Personnel responsible for creating wire transfers should be separated from the person who releases the wire transfers. If staffing does not allow for the separation, you can set up a system where your bank calls another person within the company whenever it receives a wire transfer request. This call should not go to a person who has the ability to initiate wire transfers.
Finally, perform a monthly bank reconciliation using someone not involved in the cash disbursements. Any unusual transactions or check images should be followed up and investigated.
How Do You Calculate an Opening Cash Balance?
A company's cash receipts play an important part in cash flow budgeting. You may have heard a cash flow statement called a "sources and uses statement." The company's cash receipts represent the company’s lifeblood, the sources of cash. The company's cash disbursements make up the uses of cash.
To calculate the opening balance for your sources and uses cash flow statement, all you need to do is look at your bank statement online or call the bank and enter the amount of money held in the bank. To this opening cash balance, add whatever cash receipts come in and subtract the total cash disbursements going out of the company. The total of these three parts equals your closing balance, or the amount of money you have left over. For a budget, you may find it helpful to show this calculation on a monthly basis.
For example, your opening balance is the cash that you have on the first day of the month. Your opening balance for the next month equals the closing balance for the previous month. Your opening balance of any given month always equals the same amount as the closing balance from the previous month.
As part of creating a cash flow statement, especially if you use the direct method which includes cash from operating, investing and financing activities, you may ask, "Is cash received from customers an operating activity?" Yes, but it’s not quite that simple. Not all customers pay cash, so some of the company's sales come in the form of accounts receivable since the sale was made on credit. In this case, you must start with the company’s total sales amount for a given month and adjust it based on the change in the company’s accounts receivable balance to arrive at the right cash receipts number.
If the accounts receivable increase over the period in question, deduct this increase from your sales figure to calculate the amount of cash receipts from customers. If your accounts payable balance has decreased, add this decrease amount to your total sales to calculate the total cash received from your customers.
Types of Cash Receipts
Cash receipts come to a business in many forms, predominantly from customer sales. Depending on the size and type of business, these inflows may be in the form of payments made by credit card, cash, money order or personal check, for example. A subscription-only business might receive the bulk of its cash receipts in the form of bank ACH payments. Businesses also receive cash from activities other than selling goods or services, such as royalties, interest income, dividends and capital gains from investments and proceeds from the sale of various assets.
Revenue is the money that a business receives from its normal, ongoing business activities. When it comes time to read financial statements and interpret actual cash receipts versus a calculated number, it helps to define some of the terminology. For example, are revenue and earnings the same? No, because while revenue, also called sales, represents money from customers, earnings represent what’s left over after using that revenue to pay the company’s expenses.
Are revenue and profit the same? Profit means essentially the same thing as earnings, as it represents only the amount of money left over after you’ve paid all the bills out of the money received from your customers.
And lastly, are revenue and income the same? Some people may use the term "income" to represent sales revenue, but from an accounting terminology standpoint, income is more likely to mean operating income. Operating income is slightly different from earnings or profit because it has the cost of goods and operating expenses removed from sales, but unlike earnings or profit, operating income doesn’t include tax expenses and other nonoperating expenses.