Double-entry Accounting System
4.3.3 Analysis of providing service on account transaction
Event No. 3. On May 20, 20X6 the company provided services on account (i.e., it will collect cash later) to Mandy Food Store. The client, Mr. Mandy's business was billed for $2,600. The transaction acts to increase assets (Accounts Receivable) and equity (Consulting Revenue). The asset is debited and the equity account is credited:
Illustration 4-6: Effect of recording revenue in T accounts
Assets |
= |
Liabilities |
+ |
Equity |
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Accounts Receivable |
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Consulting Revenue |
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| Debit |
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Credit |
This is an asset source transaction.
Illustration 4-7: Effect of recording revenue in the horizontal model
| Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
- |
Exp. |
= |
Net Inc. |
Cash Flow |
|
| 2,600 |
= |
n/a |
+ |
2,600 |
2,600 |
- |
n/a |
= |
2,600 |
n/a |
|
4.3.4 Analysis of paying cash for expenses transaction
Event No. 4. On April, 5 the company paid $600 cash for operating expenses. Expense recognition acts to decrease assets (Cash) and equity (Operating Expenses). Cash is credited and Operating Expense is debited:
Illustration 4-8: Effect of paying operating expenses in T accounts
Assets |
= |
Liabilities |
+ |
Equity |
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Cash |
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Operating Expense |
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Credit |
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Debit |
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An increase in expenses results in a decrease in equity. That's why we showed expenses with a plus sign and equity underneath them with a minus sign.
This is an asset use transaction:
Illustration 4-9: Effect of paying operating expenses in the horizontal model
| Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
- |
Exp. |
= |
Net Inc. |
Cash Flow |
|
| (600) |
= |
n/a |
+ |
(600) |
n/a |
- |
(600) |
= |
(600) |
(600) |
OA |
4.3.5 Analysis of taking a loan transaction
Event No. 5. On May 31, 20X6, due to liquidity problems, Huske's Consultants decided to borrow $4,000 from Local Business Bank. The company issued a note that had a 1-year term and carried 7% annual interest rate. The transaction increases assets (Cash) and liabilities (Note Payable). The asset increase is recorded as a debit and the liability increase is recorded as a credit:
Illustration 4-10: Effect of taking a loan in T accounts
Assets |
= |
Liabilities |
+ |
Equity |
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Cash |
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Note Payable |
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|
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| Debit |
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Credit |
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This is an asset source transaction:
Illustration 4-11: Effect of taking a loan in the horizontal model
| Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
- |
Exp. |
= |
Net Inc. |
Cash Flow |
|
| 4,000 |
= |
4,000 |
+ |
n/a |
n/a |
- |
n/a |
= |
n/a |
4,000 |
FA |
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