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When a business provides services to a customer on credit, it records Accounts Receivable because the customer owes money to the business. When that customer later pays the amount due, the business receives cash and the receivable is reduced. This is an important accounting transaction because it demonstrates that not every cash receipt increases total assets . The effect depends on what happened to the other asset account involved in the transaction. Multiple Choice Question (MCQ) Payment is received from customers who were billed earlier for services provided for them. For this transaction, identify the effect on the accounting equation. a. Liabilities increase and stockholders' equity decreases. b. There is no effect on the accounting equation as one asset account increases while another asset account decreases. c. Assets increase and stockholders' equity increases. d. Assets increase and liabilities increase. Correct Answer: b. There is no effect on the accounting eq...

Billed Clients for Services Provided: Effect on the Accounting Equation (With Example) Billed clients for services performed means that you, as a service company, performed the work tasks as requested by clients and send bills to clients demanding them to make payment for services provided against completed work tasks. So, you earned the revenue but the payment is not received from clients. When a business bills clients for services already provided , it has completed the work and earned the revenue. However, the customer has not paid yet . Instead of receiving cash immediately, the business records an Accounts Receivable , which represents money the customer owes. At the same time, because the service has already been performed, the business recognizes Service Revenue . Revenue increases the owner's equity because it contributes to the company's profits. Therefore, the accounting equation remains balanced as follows: Assets increase because Accounts Receivable increases. O...

Received Commission: Effect on Accounting Equation Understanding how commission transactions affect the accounting equation is essential for accounting students. When a business earns commission, it affects both assets and owner's equity. This guide explains the correct MCQ answer, journal entry, and accounting equation impact with examples. Question: Received commission. Show its effect on the accounting equation. a. Assets and owner's equity goes down b. Assets and liabilities goes up c. Assets goes down and owner's equity goes up d. Assets and owner's equity goes up Correct Answer: d) Assets and owner's equity goes up Explanation: Effect of Received Commission on Accounting Equation When a business receives commission , it means the business has earned income by providing services to a customer. In accounting, earned commission is treated as revenue because it increases the profit of the business. A commission received transaction affects two accounts: ...

Commission Received in Advance : Accounting Treatment with Journal Entry and Accounting Equation When a business receives a commission payment before completing the agreed services, the amount received is not considered earned revenue . Instead, it represents a current liability because the business still has an obligation to provide the promised services. This concept is important in accrual accounting, where revenue is recognized only after it has been earned, regardless of when cash is received. What Is Commission Received in Advance? Commission received in advance (also called Unearned Commission ) is money collected from a customer before the related services have been performed. Since the business still owes the customer the agreed services, this amount is recorded as a current liability on the balance sheet. Once the services are completed, the liability is reduced, and the amount is recognized as commission revenue. Accounts Involved Receiving commission in advance affect...

Introduction Errors in recording purchases and ending inventory can affect a company's financial statements, including its balance sheet, income statement, and financial ratios. However, the effect of an accounting error depends on how the error affects the related accounts. Suppose a company purchases goods on credit but accidentally fails to record the purchase and does not include those goods in its ending inventory. What happens to purchases, cost of goods sold, net income, accounts payable, retained earnings, working capital, and the current ratio? In this article, we will explain the effects of this accounting error under the periodic inventory system , using a practical example and simple calculations. What Happens When a Purchase Is Not Recorded? When an entity purchases goods on credit, it normally records the transaction as follows: Debit: Purchases Account Credit: Accounts Payable Account Under a periodic inventory system, purchases are recorded throughout the accoun...

When the company / corporation received the payment more than the payment written on unpaid invoices from customer / client, then the company needs to refund this amount to its customer. It creates a Current Liability i.e., refund payable account as the company is liable to pay to customers any amount in excess of unpaid dues. Suppose, the refunded amount is $150. When the company sends cheque / check to customer, the following journal entry is recorded in the Books of Accounts as shown below:                            Refund Payable a/c $150                                                           Cash a/c $150                                       (Send A Cheque To Customer ...

Yes, it is true as "The Ultimate Goal Of Accounting Is To Provide Information That Is Useful For Economic Decision-Making". Accounting provides useful information to both Internal Users And External Users of Accounting Information for making rational and economic decision purposes. For example, if the net profit of $2000 from previous period increased to $7000 due to rapid increase in sales, which is very good, then it shows that the financial performance has very much improved and the investors (external users) are more willing to investment in the company’s business. This financial information helps them in their investment decisions to invest in the company’s business as it is an economical and beneficial decision for them due to higher profit or huge financial improvement to meet daily expenses of the business. The financial information of unit per cost is also helpful for the management to check which unit of the product manufactured is costly and which is the...