7) Selling land results in a loss of $300. As the Land account had a balance of $1,000 and was sold for $700, the total assets decreased by $300. This decrease is called a loss.

Losses are similar to expenses in the way that both decrease assets or increase liabilities; however, losses differ from expenses in that they are caused by incidental transactions, rather than from ordinary operating activities.

Gains are similar to revenues; however, gains result from incidental transactions rather than from operating activities.

The sale increases Cash by $700, decreases Land by $1,000, and decreases equity (Loss) by the difference between the original cost and cash received, or $300 ($1,000 - $700):

Illustration 17: Effect of Recognizing Revenue on Account

Note that the land cost was divided into two parts: (a) cash received ($700) and (b) loss ($300), which in total equal the initial cost ($700 + $300 = $1,000).

8) All the services were finally performed in the current period, thus the company should recognize the remainder of unearned revenues from 20X7. From the initial unearned revenue amount of $3,000 received in 20X7, $1,500 was recorded as revenue at the end of 20X7. The other part of unearned revenue ($1,500) must be recognized in 20X8 for the 6 months of services. This is a claim exchange transaction because liabilities (Unearned Revenue) decrease and equity (Revenue) increases:

Illustration 18: Effect of earned revenue adjusting entry

9) Recognition of depreciation expense on the car for 20X8 is an asset use transaction. Assets and equity decrease:

Illustration 19: Effect of recognizing depreciation expense

10) Recognizing supplies as an expense is deferred until supplies are used in the process of generating revenue. It is a normal practice that the entire amount of supplies used during one accounting period is transferred to an expense account in a single year-end adjusting entry. The amount of supplies used during an accounting period is calculated by subtracting the ending balance (remaining on hand at the period end) from the beginning balance and purchases during the period. In our example, the beginning balance (supplies purchase) is $500, and the ending balance is $200. Based on this information, $300 ($500 - $200) must have been used during 20X8 accounting period. When making the year-end adjusting entry, we remove $300 of supplies from the Supplies account and put it in the Supplies Expense account:

Illustration 20: Effect of recognizing supplies expense