The Effect Of Cash Received From Sales On Accounting Equation

How Is Owner’s Equity Affected When Cash Is Received From Sales Or What Is The Effect Of Cash Received From Sales On Owner’s Equity? / How Is Owner’s Equity Affected When Services Performed Or Rendered For Cash

When the cash received from goods sold or services rendered for cash (it is called Cash Sales), then we debit cash account as it is increasing i.e., it is coming into the business and credit Sales Account as it is also increasing i.e., due to the increase of profitable activities or operations of owners of the business.

For example, if Mr.A is a sole proprietor sold goods worth Rs. 5000 to a customer, Mr. B, then the following journal entry is recorded in the books of business as shown below:

                                                           Cash a/c  5000

                                                                                 Sales a/c  5000

 

                                                            (Cash Received From Sales)

 

Cash Sales Effect On Accounting Equation

The effect of this Business Transaction on the accounting equation is shown below:

                                 Assets    = Liabilities   +    Owner’s Equity

                                      +Cash    =         0            +         (+Sales)

                                      +5000    =         0            +            5000

Cash is a current asset so it is recorded on the left side of the accounting equation and since it is increasing, so we added it to assets. Sales is a direct revenue account. and it is the result of operational activities of the owner of the business. As it is increasing, so we added it to Owner’s Equity.