How Is Owner’s Equity Affected When Goods Or Services Are Sold On Account / Credit

When goods sold or services rendered on account, then it means that the business will receive the cash later on but the sales are recorded, recognized and earned by the business. In such a case, the Accounts Receivable / Sundry Debtors, being a current asset, is created as the business will collect the cash from customers against the Sales made. Sales, which is a direct revenue, is also created and it is the result of operating activities of the owner of the business.

Example: Mr. A is a sole owner of his business. He performed services on account / credit to his customer, Mr. B for Rs. 2000. The journal entry to record for services performed is shown below:

                                                                Accounts Receivable a/c  2000

 

                                                                                                            Sales a/c  2000

 

                                                                    (Services Rendered On Account)

As accounts receivable account is increasing, so we debit it as it is a normal or usual balance for it. Similarly, sales is also increasing, so we credit as it is a favorable balance for it

The Effect of Goods Sold Or Services Performed On Account On Owner’s Equity In Accounting Equation

Note: The effect of goods sold on account / credit is the same as in case of services rendered on owner’s equity.

                                       Assets             =  Liabilities   +   Owner’s Equity

                           +Accounts Receivable   =   Liabilities    +        (+Sales)

                                            2000                 =       0              +           2000

As accounts receivable is increasing, so we add it and record it on the asset side or left side of the accounting equation. Sales is the positive result of operation of owner of the business, so it affects owner’s equity account favorably, so added it to owner’s equity on the right side of the accounting equation.