Double-entry Accounting System

4.6. Analysis of rent prepayment transaction

Event No. 6: On June 1, 20X6 Mrs. Huske realized that the business was growing and in this connection rented a larger office. $2,400 cash was paid in advance for a 1-year rent of the new office. The transaction decreases one asset account (Cash) and increases another (Prepaid Rent). To increase the Prepaid Rent account it is debited and to decrease the Cash account it is credited:

Illustration 12: Effect of rent payment in T accounts

Assets

=

Claims

Cash

+

Prepaid Rent

 

 

 

Credit
(6) - 2,400

 

Debit
(6) + 2,400

 

 

 

 

This is an asset exchange transaction.

Illustration 13: Effect of rent payment in the horizontal model

Assets

 

 

 

 

 

 

 

 

Cash

+

Prepaid Rent

=

Claims

Rev.

-

Exp.

=

Net Inc.

Cash Flow

(2,400)

+

2,400

=

n/a

n/a

-

n/a

=

n/a

(2,400)

OA

There is a cash outflow of $2,400 from operating activities because the company paid cash for the rent.

4.7. Analysis of cash collection transaction

Event No. 7: On June 15, 20X6 Huske's Consultants received $1,500 cash from Mandy Food Store for the services provided before (see Event No. 3). Cash collection increases one asset account (Cash) and decreases the other (Accounts Receivable). The Cash account is debited and the Accounts Receivable account is credited:

Illustration 14: Effect of cash collection in T accounts

Assets

=

Claims

Cash

+

Accounts Receivable

 

 

Debit
(7) + 1,500

 

 

 

Credit
(7) - 1,500

 

 

 

This is an asset exchange transaction:

Illustration 15: Effect of cash collection in the horizontal model

Assets

 

 

 

 

 

 

 

 

Cash

+

Accounts
Receivable

=

Claims

Rev.

-

Exp.

=

Net Inc.

Cash Flow

1,500

+

(1,500)

=

n/a

n/a

-

n/a

=

n/a

1,500

OA

Note the $1,500 cash inflow from operating activities in this transaction. This cash collection resulted in cash inflow from the customer.

4.8. Analysis of cash advance receipt transaction

Event No. 8: On June 30, 20X6 Mrs. Huske signed a contract with Mining Company to perform consulting services. The services are to be provided during the 12 months starting on July 1, 20X6. Huske's Consultants received an advance cash payment in amount of $3,600 for services to be performed under this contract. The transaction acts to increase assets (Cash) and liabilities (Unearned Revenue). The asset is debited and the liability is credited:

Illustration 16: Effect of cash advance receipt in T accounts

Assets

=

Liabilities

+

 Equity

Cash

 

Unearned Revenue

 

 

Debit
(8) + 3,600

 

 

 

Credit
(8) + 3,600

 

 

 

This is an asset source transaction:

Illustration 17: Effect of cash advance receipt in the horizontal model

Assets

=

Liabilities

+

Equity

Rev.

-

Exp.

=

Net Inc.

Cash Flow

3,600

=

3,600

+

n/a

n/a

-

n/a

=

n/a

3,600

OA

The $3,600 cash received is shown as a cash inflow from operating activities.

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