## 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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