MCQ: Received Commission. Show Its Effect on the Accounting Equation
Received Commission: Effect on Accounting Equation (MCQ Explanation)
Question:
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:
Cash Account (Asset Account)
Commission Received Account (Revenue Account)
When cash is received:
The Cash Account increases because money comes into the business.
The Commission Received Account increases because the business earns revenue.
According to the rules of debit and credit:
Cash Account is debited because an asset increases.
Commission Received Account is credited because revenue increases.
Journal Entry
| Account | Debit | Credit |
|---|---|---|
| Cash A/c | XXX | |
| Commission Received A/c | XXX |
How Does Received Commission Affect Owner's Equity?
Revenue does not directly increase owner's capital at the time of recording the transaction. However, revenue increases the business profit, and profit ultimately increases the owner's equity.
Therefore:
Commission Received → Increase in Revenue → Increase in Profit → Increase in Owner's Equity
This is why receiving commission has a positive effect on owner's equity.
Effect of Received Commission on Accounting Equation
The basic accounting equation is:
Assets = Liabilities + Owner's Equity
After receiving commission:
| Assets | = | Liabilities | + | Owner's Equity |
|---|---|---|---|---|
| + Cash | = | No Change | + | + Commission Revenue |
Explanation:
Cash increases, so total assets increase.
No loan or obligation is created, so liabilities remain unchanged.
Commission earned increases business income, so owner's equity increases.
The accounting equation remains balanced because the increase in assets is equal to the increase in owner's equity.
Why Other Options Are Incorrect
Option (a): Assets and owner's equity goes down ❌
This option is incorrect because receiving commission brings cash into the business. Cash is an asset, so assets increase. Since commission is revenue, owner's equity also increases.
Option (b): Assets and liabilities goes up ❌
Although assets increase, liabilities do not increase. The business has earned commission; it has not borrowed money or created any obligation.
Option (c): Assets goes down and owner's equity goes up ❌
This is incorrect because receiving cash increases assets. Assets decrease only when the business pays cash or loses resources.
Practical Example
Suppose a business receives $1,000 commission from a customer.
The accounting effect will be:
Before Transaction:
Assets = Liabilities + Owner's Equity
After Receiving Commission:
Cash increases by $1,000
Commission revenue increases by $1,000
Owner's equity increases through profit by $1,000
The equation becomes:
Assets + $1,000 = Liabilities + Owner's Equity + $1,000
The equation remains balanced.
Key Accounting Rule to Remember
Whenever a business receives earned income:
Therefore, the effect of received commission on the accounting equation is:
Assets Increase and Owner's Equity Increase
Final Answer: d) Assets and owner's equity goes up
Frequently Asked Questions (FAQs)
Is commission received an asset or income?
Commission received is income (revenue). If it is received in cash, cash is recorded as an asset.
Why does revenue increase owner's equity?
Revenue increases profit, and profit increases the owner's claim on business assets, which increases owner's equity.
Does receiving commission always increase assets?
Yes, when the commission is received in cash or through bank. If commission is earned but not yet received, it creates an accounts receivable asset instead, which still increases assets on accounting equation.
Summary
A business receiving commission records:
The transaction increases:
Assets ✅
Owner's Equity ✅
and keeps the accounting equation balanced.
Correct MCQ Answer: (d) Assets and owner's equity goes up.
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