Chapter 2
Linking Personal Accounting to Business Accounting
42
Transaction 4: Customer prepays for services
One way to receive payment for services is for the customer to pay for services before they are
performed. In this case, when the customer pays cash no work has been performed. In fact, the
services will not be provided until next month.This means that service revenue cannot be affected.
Ace Bookkeepers has now accepted an obligation to provide services in one month. An obligation
is a liability,meaning we must record the amount received as an increase to cash and an increase to a
liability account called unearned revenue. Unearned revenue represents the obligation the business
has to provide services or products to customers in the future. If services are not performed by the
business, the cash must be returned to the customer. The transaction is illustrated in Figure 2.20.
The transaction to turn this liability into revenue will be covered in a later chapter.
Record the transaction in the T-accounts
CASH
+
-
2,000
UNEARNED REVENUE
-
+
2,000
Analyze the impact on the accounting equation
Assets = Liabilities + Owner’s Equity
+ 2,000
+ 2,000
*Explanation of changes to Owner’s Equity
Explanation*
______________
FIGURE 2.20
Transaction 5: Provided services for cash
The sale of services is called revenue and it is the primary way a service business increases owner’s
equity.This transaction is recorded by increasing cash and increasing service revenue.The equity in
the business increases and is recorded as an increase to service revenue.
Record the transaction in the T-accounts
CASH
SERVICE REVENUE
+
-
-
+
15,000
15,000
Analyze the impact on the accounting equation
Assets = Liabilities + Owner’s Equity
+ 15,000
+ 15,000
Explanation*
*Explanation of changes to Owner’s Equity
Revenue earned
______________
FIGURE 2.21
Transaction 6: Provided services on account
An alternate way to receive payment for services provided is to allow a customer to pay at a later
date. Services were provided so revenue must be affected, however cash cannot be affected since
there has been no payment. Instead, another asset called accounts receivable will increase. Recall
