At some point in time you may have customers that are unable to pay for the goods or services they received from you. As your business matures, you will be able to estimate the amount of such losses. Many businesses calculate this expense on a monthly basis based on sales or a percentage of past due accounts. Your accountant can assist you with determining whether or not you should record an allowance for doubtful accounts. The allowance for doubtful accounts is subtracted from gross receivables on the Balance Sheet to show the net receivable balance.
Inventory consists of the goods and materials a company purchases to re-sell at a profit.
In the process, sales and receivables are generated. For a company that sells a product, inventory is often the first use of cash. Only after a time lag equal to the receivable's collection period will cash return to the company. Thus, it is very important that the level of inventory be well managed so that the business does not keep too much cash tied up in inventory as this will reduce profits. The correct level of inventory is a function of the length of the company's inventory cycle and the company's sales level.