Chapter 2
Linking Personal Accounting to Business Accounting
43
that accounts receivable is the amount owing to the business from its customers. Since accounts
receivable will eventually be collected and become cash, it is regarded as an asset. Since services
were provided at this time, the equity in the business increases and is recorded as an increase to
service revenue. A customer payment for this service will be shown in transaction 15.
Record the transaction in the T-accounts
ACCOUNTS RECEIVABLE
SERVICE REVENUE
+
-
-
+
4,000
4,000
Analyze the impact on the accounting equation
Assets = Liabilities + Owner’s Equity
+ 4,000
+ 4,000
*Explanation of changes to Owner’s Equity
Revenue earned
Explanation*
______________
FIGURE 2.22
Transaction 7: Prepaid insurance for one year with cash
It is common for a business to prepay various expenses such as insurance, web-hosting fees,
consulting fees and legal fees. Recall from the previous chapter how prepaid expenses are recorded.
The same concept is practiced in business.The item that is prepaid is initially recorded as an asset on
the balance sheet. Figure 2.23 shows how the prepayment for insurance is recorded by decreasing
cash and increasing prepaid insurance. The transaction to convert this asset to an expense will be
covered in a later chapter.
Record the transaction in the T-accounts
CASH
PREPAID INSURANCE
+
+ -
-
6,000
6,000
Analyze the impact on the accounting equation
Assets = Liabilities + Owner’s Equity
- 6,000
+ 6,000
*Explanation of changes to Owner’s Equity
Explanation*
______________
FIGURE 2.23
Transactions 8 through 10: Paid cash for expenses
All these transactions relate to cash expenses.The transactions are recorded by decreasing the value
of the cash account and increasing the value of the appropriate expense account. These expenses
were incurred by the business in order to run the business and help generate revenue. Remember,
the equity in the business decreases and is recorded as an increase to expenses.
