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 |
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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 7: Effect of recording revenue in the horizontal model
Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
- |
Exp. |
= |
Net Inc. |
Cash Flow |
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2,600 |
= |
n/a |
+ |
2,600 |
2,600 |
- |
n/a |
= |
2,600 |
n/a |
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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 |
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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 9: Effect of paying operating expenses in the horizontal model
Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
- |
Exp. |
= |
Net Inc. |
Cash Flow |
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(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 |
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Cash |
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Note Payable |
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Debit |
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Credit |
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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 |
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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.