Chapter 1 Introduction to Accounting and Business

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The purchase of the land changes the makeup of the assets, but it does not change
the total assets. The items in the equation prior to this transaction and the effect of
the transaction are shown below. The new amounts are called balances.

Assets 5 Stockholders’ Equity

Cash + Land Capital Stock
Bal. 25,000 = 25,000
b. –20,000 +20,000
Bal. 5,000 20,000 25,000

Nov. 10, 2013 NetSolutions purchased supplies for $1,350 and agreed to pay the Transaction C
supplier in the near future.
You have probably used a credit card to buy clothing or other merchandise. In this type of
transaction, you received clothing for a promise to pay your credit card bill in the future.
That is, you received an asset and incurred a liability to pay a future bill. NetSolutions
entered into a similar transaction by purchasing supplies for $1,350 and agreeing to pay
the supplier in the near future. This type of transaction is called a purchase on account
and is often described as follows: Purchased supplies on account, $1,350.
The liability created by a purchase on account is called an account payable. Items
such as supplies that will be used in the business in the future are called prepaid
expenses, which are assets. Thus, the effect of this transaction is to increase assets
(Supplies) and liabilities (Accounts Payable) by $1,350, as follows:

Assets 5 Liabilities 1 Stockholders’ Equity

Accounts + Capital
Cash + Supplies + Land Payable Stock
=
Bal. 5,000 20,000 25,000
c.   +1,350 +1,350
Bal. 5,000 1,350 20,000 1,350 25,000

Nov. 18, 2013 NetSolutions received cash of $7,500 for providing services to customers. Transaction D
You may have earned money by painting houses or mowing lawns. If so, you received
money for rendering services to a customer. Likewise, a business earns money by
selling goods or services to its customers. This amount is called revenue.
During its first month of operations, NetSolutions received cash of $7,500 for provid-
ing services to customers. The receipt of cash increases NetSolutions’ assets and also
increases stockholders’ equity in the business. The revenues of $7,500 are recorded in
a Fees Earned column to the right of Capital Stock. The effect of this transaction is to
increase Cash and Fees Earned by $7,500, as follows.

Assets 5 Liabilities 1 Stockholders’ Equity

Accounts Capital Fees
Cash + Supplies + Land Payable + Stock + Earned
=
Bal. 5,000 1,350 20,000 1,350 25,000
d. +7,500 +7,500
Bal. 12,500 1,350 20,000 1,350 25,000 7,500

Different terms are used for the various types of revenues. As illustrated above, revenue
from providing services is recorded as fees earned. Revenue from the sale of merchandise
is recorded as sales. Other examples of revenue include rent, which is recorded as rent
revenue, and interest, which is recorded as interest revenue.
Instead of receiving cash at the time services are provided or goods are sold, a
business may accept payment at a later date. Such revenues are described as fees
earned on account or sales on account. For example, if NetSolutions had provided
services on account instead of for cash, transaction (d) would have been described
as follows: Fees earned on account, $7,500.