Double-entry Accounting System

4.3. Analysis of providing services on account transaction

Event No. 3: On May 20, 20X6 the company provided services on account (i.e., the company 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 (by increasing Consulting Revenue). The asset is debited and the equity account is credited:

Illustration 6: Effect of recording revenue in T accounts

Assets

=

Liabilities

+

 Equity

Accounts Receivable

 

 

 

Consulting Revenue

Debit
(3) + 2,600

 

 

 

 

 

 

Credit
(3) + 2,600

This is an asset source transaction.

Illustration 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

 

Note that no cash flow is shown at this point because the customer agreed to pay the $2,600 later.

4.4. Analysis of paying cash for expenses transaction

Event No. 4: On May 25, 20X6 the company paid $600 cash for operating expenses. The expense recognition acts to decrease assets (Cash) and equity (Operating Expenses). The Cash account is credited and the Operating Expense account is debited:

Illustration 8: Effect of paying operating expenses in T accounts

Assets

=

Liabilities

+

 Equity

Cash

 

 

 

Operating Expense

 

Credit
(4)  - 600

 

 

 

 

Debit
+ Expense
[ - Equity]
(4)  - 600

 

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 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

Note the $600 cash outflow. The company paid cash for expenses so there is a cash decrease related to this transaction.

4.5. Analysis of taking a loan transaction

Event No. 5: On June 1, 20X6, due to liquidity concerns, 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 10: Effect of taking a loan in T accounts

Assets

=

Liabilities

+

 Equity

Cash

 

Note Payable

 

 

Debit
(5) + 4,000

 

 

 

Credit
(5) + 4,000

 

 

 

This is an asset source transaction:

Illustration 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

There is a cash inflow of $4,000 from financing activities in this transaction because the company received cash from the bank.

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