- Now that you have your lawnmower, transportation, supplies
and inventory, it's time for you to get to work.
The next category of common transactions involves the sales
of service or merchandise.
You generate revenues
and incur expenses during this process.
Sometimes you might sell services and merchandise for cash,
at other times you might sell them on credit
and a receivable is established for collection
at a later date.
Therefore revenues indicate the source, not only of cash
but of other assets as well,
all of which are received in exchange for the merchandise
or services provided.
Similarly, expenses may be incurred and paid immediately
with cash or they may be incurred on credit
and as they may be charged with a cash payment
to be made at a later date,
we will illustrate these possibilities
in the transactions to follow.
And note that the effective revenues and expenses
on owner's equity is indicated
in brackets for each transaction.
So, let's get started.
As soon as your neighbors find out
that you're in the lawn care and landscaping business,
your phone begins ringing.
Although most of your clients pay you immediately
when you perform the service,
some prefer to pay you just once a month.
As a result, a portion of your revenues
is received immediately in cash
while the balance becomes a receivable.
The journal entry to record your first week's revenue
for lawn care services is as follows.
A debit to cash because cash is an asset
and assets go up with debits for $270.
And then a debit to accounts receivable,
again because accounts receivable is an asset
and assets increase with debits for $80.
And then we have a credit to lawn care revenue for $350.
Lawn care revenue is a revenue account
which based on the expanded accounting equation
is part of owner's equity
and we know that owner's equity accounts go up
with a credit.
As this journal entry illustrates,
more than two accounts can be involved
in recording a transaction.
This type of entry is called a compound journal entry.
Because revenues increase with owner's equity,
the accounting equation shows an increase in assets
and an increase in owner's equity, both increasing by $350.
Now, please note that revenue is not an asset.
The assets in this transaction are the cash
and the accounts receivable.
Revenue is the label given to the source of these assets.
They were generated in the normal course of business.
When assets are received from investment by owners,
the source of the asset is capital stock,
part of owner's equity as we showed previously.
When assets are borrowed,
the source of the asset is a liability
and when are assets are generated
by providing a good or service,
the source of that asset is labeled as revenue.