Which Types Of Accounts Are Affected When A Business Receives Cash Or Cheque / Check From Sales

What Is The Effect Of Cash Received From Sales On The Accounting Equation

When a business receives Cash from goods / merchandise sold or Sales, then the cash account on the asset side (left side) of Accounting Equation is affected and Owner’s Equity on the right side of the accounting equation is affected as sales is the result of operating activities of the owner of the business.

Example, Mr. A is a sole proprietor, received cash Rs. 5000 from sales. What is the effect of this transaction on the accounting equation?

Firstly, we must know the journal entry for the cash sales transaction. So, the following journal entry is recorded for cash received from sales:

                                                                              Cash a/c  5000

 

                                                                                                        Sales a/c  5000

 

                                                                              (Goods / Merchandise Sold For Cash)

Cash is a current asset and it is increasing as it is coming into the business, so we debit it. Sales is also increasing and as credit side is a favorable or normal for sales revenue account, so increase in sales is credited i.e., due to profitable activities of the owner of the business.

Note: A sole owner may also received Bank from sales as in such case, we received cheque / check from customer for merchandise sold. In such case, the result is the same as in case of cash account. The only change is that we replace cash account with bank account.

The Effect of Cash / Cheque Or Check Received From Sales On Accounting Equation

                                                 Assets =  Liabilities +    Owner’s Equity

                                                 +Cash   =         0        +       (+Sales)

                                                 +5000   =         0        +          5000

                                                   5000   =         0        +          5000

 

The asset side of the accounting equation is increased by Rs. 5000 due to an increase in Cash of Rs. 5000 while the right side of the accounting equation is also increased by Rs. 5000 as an increase in sales due to operational activities or profitable activities of the owner of the business. Hence, the accounting equation remains in balance