Chapter 2
Linking Personal Accounting to Business Accounting
35
Cash Received when the Service is Performed
When a company performs a service and the
customer pays for it immediately, the trans-
action is fairly straightforward. From the
service provider’s perspective, cash increases
and equity increases. The increase in equity
is recognized as revenue and increases net
income.
If a client pays $1,100 cash immediately
when the business provides the service, then
cash and service revenue will be affected.The
impact on cash and service revenue is shown
in Figure 2.10. Remember that recognizing
revenue results in an increase to equity.
Cash Received after the Service is Performed
Most businesses provide customers with payment terms which allow customers to pay after they
have received the product or service (e.g. 30 days to pay the balance owing).This form of making
sales is sometimes referred to as “selling on account.” You may mistakenly think that the value of
equity would not change when selling with payment terms because no cash was received from the
sale. However, revenue must be recorded at the time the product is sold or the service is delivered,
regardless of when the payment is received.
When a company provides payment terms to
sell its products or services, the money owed
by its customers is recorded as an asset, called
accounts receivable.After a service is provided,
the seller issues an
invoice
to the buyer. The
invoice includes the details of the service
rendered and the agreed-upon price. This
indicates that the customer now owes the
balance and needs to pay the seller by the date
stated on the invoice. From the seller’s
perspective, this indicates an increase in
accounts receivable (an asset) and an increase
in equity (recognized as revenue). Later, when
the customer actually pays the outstanding
amount, the issuing company increases cash
and decreases accounts receivable. The
______________
FIGURE 2.10
INCOME STATEMENT
NET INCOME (LOSS)
EXPENSES
2
ASSETS
BALANCE SHEET
LIABILITIES
CASH
ACCOUNTS
RECEIVABLE
PROPERTY, PLANT
& EQUIPMENT
PREPAID
EXPENSES
OFFICE
SUPPLIES
ACCOUNTS
PAYABLE
UNEARNED
REVENUE
BANK
LOAN
+ $1,100
SERVICE REVENUE
DEPRECIATION
INTEREST
INSURANCE
SALARIES
RENT
TELEPHONE
TRAVEL
MAINTENANCE
Owner’s equity increases by $1,100
OWNER’S EQUITY
OWNER’S
CAPITAL
OWNER’S
DRAWINGS
+ $1,100
INCOME STATEMENT
NET INCOME (LOSS)
EXPENSES
2
ASSETS
BALANCE SHEET
LIABILITIES
CASH
ACCOUNTS
RECEIVABLE
PROPERTY, PLANT
& EQUIPMENT
PREPAID
EXPENSES
OFFICE
SUPPLIES
ACCOUNTS
PAYABLE
UNEARNED
REVENUE
BANK
LAON
+ $1,100
SERVICE REVENUE
DEPRECIATION
INTEREST
INSURANCE
SALARIES
RENT
TELEPHONE
TRAVEL
MAINTENANCE
Owner’s equity increases by $1,100
OWNER’S EQUITY
OWNER’S
CAPITAL
OWNER’S
DRAWINGS
+ $1,100
______________
FIGURE 2.11
