Making a profit in business comes from several areas. This can get a little tricky because, just like in our personal life, businesses are also run on credit. Many companies sell their products to their customers on credit.
Accountants use a balance sheet called credits to record the total amount owed to a business by its customers that has not paid the balance in full. Often a company has not collected its receivables in full at the end of the fiscal year, especially for the assignments of receivables that can be made towards the end of the fiscal year.
Accountants record the sales revenue and cost of goods sold for these sales in the year the sale is made and the product is shipped to the customer. This is called accrual accounting, which records revenues when sales are made and also records expenses when they are incurred. When a sale on credit is made, the fixed asset account of the receivables increases. When customers receive cash, the cash account increases and the customer account decreases.
Cost of sales is one of the main expenses of a company that sells goods, products or services. The services are also subject to charges. This means exactly as it says it is a commission that a company pays for the product it sells to its customers. A firm makes a profit by selling its product at a price high enough to cover the costs of production, the costs of running the firm, interest on the money it borrows, and income taxes, with the remaining money for the profit.
When a company buys a product, the cost goes to what is called an inventory account. Expenses are deducted from the cash account or added to the liability account of the accounts payable, depending on whether the company paid in cash or by credit.