- In addition to expenses relating to the sale of inventory,
other expenses are also incurred in operating businesses.
Examples in our business include gas for the lawnmower,
and your truck, and the wages you agreed to pay
for your little brother for working for you.
After all, mom said you had to hire him.
The following journal entries illustrate
how these expenses would be accounted for.
Gasoline expense is a debit for $50,
recognizing that owner's equity is decreasing.
And cash is created to show that cash went down.
The cash paid for wages
is treated the same way,
a debit to the expense account
and a credit to cash.
The effect on the accounting equation
of the gasoline as expense
is that it decreases assets by 50
and decreases my owner's equity by $50 as well.
Now the entry for wage expense
affects the equation in the same manner,
the only difference being the amount: $60.
Obviously, once merchandise or services
are sold on account, the receivable must be collected.
The cash received is generally used
to meet daily operating expenses
and to pay other obligations.
Excess cash can be reinvested in the business
or distributed to the owners
as a return on their investment.
So now it's the end of the month.
Let's go collect some cash.
The collection of accounts receivable
is an important aspect of most businesses.
Receivables are created when you allow
certain customers to pay for your services at a later date.
When receivables are collected,
the asset is reduced and cash is increased
as shown in this journal entry.
The asset cash increased,
and increased with a debit of course.
The asset accounts receivable decreases.
That's shown with a credit.
Now the effect of collecting receivables
on the accounting equation is this.
Now note that no revenue is involved here.
Revenue is recorded when the original sales transaction
creates the accounts receivable.
The cash collection on account
merely involves exchanging one asset for another.
Now, remember that lawnmower and gas
that you purchased on account?
Well, now you have to pay for 'em.
What would the journal entry be
to pay off that previously recorded accounts payable?
What would that look like?
Well, let me think.
Cash is being paid.
That means cash is going down,
and cash, being an asset, goes down with the credit.
So what's the corresponding debit?
Well, our liability's being paid.
It is no longer.
Liabilities go down with debits.
There you go.