1Bt t10RT 0f

N01T tl6B
ln18CuuC1lCn Cl MCn1? SlnCP
MonLy Slngh a savvy man who sees Lhe need for a
parcel dellvery servlce ln hls communlLy MonLy has
researched hls ldea and has prepared a buslness plan
LhaL documenLs Lhe vlablllLy of hls new buslness
MonLy has also meL wlLh an aLLorney Lo dlscuss Lhe
form of buslness he should use Clven hls speclflc
slLuaLlon Lhey concluded LhaL a corporaLlon wlll be
besL
MonLy decldes LhaL Lhe name for hls corporaLlon wlll be
ulrecL uellvery vL LLd 1he aLLorney also advlses
MonLy on Lhe varlous permlLs and governmenL
ldenLlflcaLlon numbers LhaL wlll be needed for Lhe new
corporaLlon
MonLy ls a hard worker and a smarL man
buL admlLs he ls noL comforLable wlLh
maLLers of accounLlng
Pe assumes he wlll use some accounLlng
sofLware buL wanLs Lo meeL wlLh a
professlonal accounLanL before maklng hls
selecLlon
Pe asks hls banker Lo recommend a
professlonal accounLanL who ls also skllled ln
explalnlng accounLlng Lo someone wlLhouL
an accounLlng background
MonLy wanLs Lo undersLand Lhe flnanclal
sLaLemenLs and wanLs Lo keep on Lop of hls
new buslness Pls banker recommends Mr
8aLllwala an accounLanL who has helped
many of Lhe banks small buslness
cusLomers
ln18CuuC1lCn Cl MCn1? SlnCP
MCn1? SlnCP MLL1S 8A1LlWALA
AL hls flrsL meeLlng wlLh 8aLllwala MonLy
asks hlm for an overvlew of accounLlng
flnanclal sLaLemenLs and Lhe need for
accounLlng sofLware
8ased on MonLy's buslness plan 8aLllwala
sees LhaL Lhere wlll llkely be Lhousands of
LransacLlons each year
Pe sLaLes LhaL accounLlng sofLware wlll allow
for Lhe elecLronlc recordlng sLorlng and
reLrleval of Lhose many LransacLlons
AccounLlng sofLware wlll permlL MonLy Lo
generaLe Lhe flnanclal sLaLemenLs and oLher
reporLs LhaL he wlll need for runnlng hls
buslness
ACCCun1lnC 1L8MS uZZLLS
MCn1? SlnCP
MonLy seems puzzled by Lhe Lerm LransacLlon so
8aLllwala glves hlm flve examples of LransacLlons LhaL
ulrecL uellvery vL LLd wlll need Lo record
MonLy wlll no doubL sLarL hls buslness by puLLlng
some of hls own personal money lnLo lL ln effecL he
ls buylng shares of ulrecL uellverys common sLock
ulrecL uellvery wlll need Lo buy a sLurdy dependable
dellvery vehlcle
1he buslness wlll begln earnlng fees and bllllng
cllenLs for dellverlng Lhelr parcels
1he buslness wlll be collecLlng Lhe fees LhaL were
earned
1he buslness wlll lncur expenses ln operaLlng Lhe
buslness such as a salary for MonLy expenses
assoclaLed wlLh Lhe dellvery vehlcle adverLlslng eLc
lMC81AnCL Cl ACCCun1lnC SCl1WA8L
WlLh Lhousands of such LransacLlons ln a glven year
MonLy ls smarL Lo sLarL uslng accounLlng sofLware
rlghL from Lhe beglnnlng
AccounLlng sofLware wlll generaLe sales lnvolces and
accounLlng enLrles slmulLaneously prepare
sLaLemenLs for cusLomers wlLh no addlLlonal work
wrlLe cheques auLomaLlcally updaLe accounLlng
records eLc
8y geLLlng lnLo Lhe hablL of enLerlng all of Lhe days
buslness LransacLlons lnLo hls compuLer MonLy wlll
be rewarded wlLh fasL and easy access Lo Lhe
speclflc lnformaLlon he wlll need Lo make sound
buslness declslons
8aLllwala Lells MonLy LhaL accounLlngs LransacLlon
approach ls useful rellable and lnformaLlve
WnA1 AkL IINANCIAL
S1A1LMLN1S
Pe has worked wlLh oLher small buslness
owners who Lhlnk lL ls enough Lo slmply know
Lhelr company made 8s 30000 durlng Lhe year
(based only on Lhe facL LhaL lL owns 8s 30000
more Lhan lL dld on !anuary 1)
1hose are Lhe people who sLarL off on Lhe
wrong fooL and end up ln 8aLllwala's offlce
looklng for flnanclal advlce
lf MonLy enLers all of ulrecL uellverys
LransacLlons lnLo hls compuLer good accounLlng
sofLware wlll allow MonLy Lo prlnL ouL hls
flnanclal sLaLemenLs wlLh a cllck of a buLLon
8aLllwala explalned MonLy Lhe conLenL and
purpose of Lhe Lhree maln flnanclal sLaLemenLs
lncome SLaLemenL
8alance SheeL
SLaLemenL of Cash llows
INCCML S1A1LMLN1
8aLllwala polnLs ouL LhaL an lncome
sLaLemenL wlll show how ptofltoble ulrecL
uellvery has been durlng Lhe Llme lnLerval
shown ln Lhe sLaLemenLs headlng
1hls perlod of Llme mlghL be a week a
monLh Lhree monLhs flve weeks or a
yearMonLy can choose whaLever Llme
perlod he deems mosL useful
1he reporLlng of proflLablllLy lnvolves Lwo
Lhlngs Lhe amounL LhaL was earned
(revenues) and Lhe expenses necessary Lo
earn Lhe revenues
As you wlll see nexL Lhe Lerm teveooes ls
noL Lhe same as recelpLs and Lhe
Lerm expeoses lnvolves more Lhan [usL
wrlLlng a cheque Lo pay a blll
8LvLnuL
1he maln revenues for ulrecL uellvery are Lhe fees lL
earns for dellverlng parcels under Lhe accrua| bas|s of
account|ng (as opposed Lo Lhe lesspreferred cash
method of account|ng) revenues are recorded when
Lhey are eotoeJ noL when Lhe company tecelves Lhe
money
8ecordlng revenues when Lhey are earned ls Lhe resulL
of one of Lhe baslc accounLlng prlnclples known as
Lhe revenue recogn|t|on pr|nc|p|e
lor example lf MonLy dellvers 1000 parcels ln
uecember for 8s 4 per dellvery he has
Lechnlcally eotoeJ fees LoLallng 8s 4000 for LhaL monLh
Pe sends lnvolces Lo hls cllenLs for Lhese fees and hls
Lerms requlre LhaL hls cllenLs musL pay by !anuary 10
Lven Lhough hls cllenLs wonL be paylng ulrecL uellvery
unLll !anuary 10 Lhe accrual basls of accounLlng
requlres LhaL Lhe 8s 4000 be recorded
as ecembet revenues slnce LhaL ls when Lhe dellvery
work acLually Look place
8LvLnuLS
AfLer expenses are maLched wlLh Lhese
revenues Lhe lncome sLaLemenL for uecember
wlll show [usL how ptofltoble Lhe company was
ln dellverlng parcels ln uecember
When MonLy recelves Lhe 8s 4000 worLh of
paymenL cheques from hls cusLomers on
!anuary 10 he wlll make an accounLlng enLry Lo
show Lhe money was recelved
This Rs 4,000 of receipts will not be considered to be January
revenues, since the revenues were already reported as revenues
in December when they were earned.
This Rs 4,000 of receipts will be recorded in January as a
reduction in Accounts ReceivabIe. (n December Monty had
made an entry to Accounts Receivable and to SaIes.)
LxLnSLS
now 8aLllwala Lurns Lo Lhe second parL of Lhe
lncome sLaLemenLexpenses
1he uecember lncome sLaLemenL should show
expenses locotteJ durlng uecember regardless
of when Lhe company acLually polJ for Lhe
expenses
lor example lf MonLy hlres someone Lo help
hlm wlLh uecember dellverles and MonLy
agrees Lo pay hlm 8s 300 on !anuary 3 LhaL 8s
300 expense needs Lo be shown on
Lhe ecembet lncome sLaLemenL
1he acLual daLe LhaL Lhe 8s 300 ls pald ouL
doesnL maLLerwhaL maLLers ls when Lhe work
was donewhen Lhe expense was locotteJ
and ln Lhls case Lhe work was done ln
uecember
1he 8s 300 expense ls counLed as a uecember
expense even Lhough Lhe money wlll noL be pald
ouL unLll !anuary 3
1he recordlng of expenses wlLh Lhe relaLed
revenues ls assoclaLed wlLh anoLher baslc
accounLlng prlnclple known as Lhe match|ng
pr|nc|p|e
8aLllwala explalns Lo MonLy LhaL showlng Lhe 8s
300 of wages expense on Lhe uecember lncome
sLaLemenL wlll resulL ln a motcbloq of Lhe cosL of
Lhe labor used Lo dellver Lhe uecember parcels
wlLh Lhe revenues from dellverlng Lhe uecember
parcels
1hls maLchlng prlnclple ls very lmporLanL ln
measurlng [usL how proflLable a company was
durlng a glven Llme perlod
LxLnSLS
8aLllwala ls dellghLed Lo see LhaL MonLy already has an
lnLulLlve grasp of Lhls baslc accounLlng prlnclple
ln order Lo earn revenues ln uecember Lhe company had Lo
lncur some buslness expenses ln uecember even lf Lhe
expenses wonL be polJ unLll !anuary
CLher expenses Lo be maLched wlLh uecembers revenues
would be such Lhlngs as gas for Lhe dellvery van and
adverLlslng spoLs on Lhe radlo
MonLy asks 8aLllwala Lo provlde anoLher example of a cosL
LhaL wouldnL be pald ln uecember buL would have Lo be
shown / maLched as an expense on uecembers lncome
sLaLemenL
8aLllwala uses Lhe Interest Lxpense on borrowed money as
an example Pe asks MonLy Lo assume LhaL on uecember 1
ulrecL uellvery borrows 8s 20000 from MonLy's aunL and
Lhe company agrees Lo pay hls aunL 6 per year ln lnLeresL
or 8s 1200 per year 1hls lnLeresL ls Lo be pald ln a lump
sum each on uecember 1 of each year
LxLnSLS
now even Lhough Lhe lnLeresL ls belng pald ouL Lo
hls aunL only once per year as a lump sum MonLy
can see LhaL ln reallLy a llLLle blL of LhaL lnLeresL
expense ls locotteJ each and every day hes ln
buslness
lf MonLy ls preparlng mootbly lncome sLaLemenLs
MonLy should reporL one monLh of lnLeresL
Lxpense on each monLhs lncome sLaLemenL
1he amounL LhaL ulrecL uellvery wlll lncur as
lnLeresL Lxpense wlll be 8s 100 per monLh all year
long (8s 20000 x 6 12)
ln oLher words MonLy needs Lo maLch 8s 100 of
lnLeresL expense wlLh each monLhs revenues 1he
lnLeresL expense ls consldered a cosL LhaL ls
necessary Lo earn Lhe revenues shown on Lhe
lncome sLaLemenLs
LxLnSLS
8aLllwala explalns Lo MonLy LhaL Lhe lncome
sLaLemenL ls a blL more compllcaLed Lhan whaL she
[usL explalned buL for now she [usL wanLs MonLy Lo
learn some baslc accounLlng concepLs and some of
Lhe accounLlng Lermlnology
8aLllwala does make sure however LhaL MonLy
undersLands one slmple yeL lmporLanL polnL an
locome sLaLemenL does oot reporL Lhe cosb comlng
lnraLher lLs purpose ls Lo (1) reporL Lhe teveooes
eotoeJ by Lhe companys efforLs durlng Lhe perlod
and (2) reporL Lhe expenses lncurred by Lhe company
durlng Lhe same perlod
1he purpose of Lhe lncome sLaLemenL ls Lo show a
companys ptofltoblllty durlng a speclflc perlod of
Llme 1he dlfference (or neL) beLween Lhe revenues
and expenses for ulrecL uellvery ls ofLen referred Lo
as Lhe bottom ||ne and lL ls labeled as elLher Net
Income or Net Loss
LxLnSLS
ALANCL SnLL1 ASSL1S
8aLllwala moves on Lo explaln Lhe balance sheeL
a flnanclal sLaLemenL LhaL reporLs Lhe amounL of
a companys %A) asseLs %) llablllLles
and %C) sLockholders (or owners) equlLy aL a
speclflc polot lo tlme
8ecause Lhe balance sheeL reflecLs a
speclflc polot lo tlme raLher Lhan a petloJ of
tlme 8aLllwala llkes Lo refer Lo Lhe balance sheeL
as a snapshoL of a companys flnanclal poslLlon
aL a glven momenL
lor example lf a balance sheeL ls daLed
uecember 31 Lhe amounLs shown on Lhe
balance sheeL are Lhe balances ln Lhe accounLs
afLer all LransacLlons perLalnlng Lo uecember 31
have been recorded
Assets
AsseLs are Lhlngs LhaL a company owns and are
someLlmes referred Lo as Lhe resources of Lhe
company
MonLy readlly undersLands Lhlsoff Lhe Lop of hls
head he names Lhlngs such as Lhe companys vehlcle
lLs cash ln Lhe bank all of Lhe supplles he has on hand
and Lhe dolly he uses Lo help move Lhe heavler
parcels
8aLllwala nods and shows MonLy how Lhese are
reporLed ln accounLs called Ieh|c|es Cash Supp||es
and Lqu|pment
Pe menLlons one asseL MonLy hadnL consldered
Accounts kece|vab|e lf MonLy dellvers parcels buL
lsnL pald lmmedlaLely for Lhe dellvery Lhe amounL
owed Lo ulrecL uellvery ls an asseL known as AccounLs
8ecelvable
9kL9AID
8aLllwala brlngs up anoLher less obvlous asseL
Lhe unexplred porLlon of prepa|d expenses
Suppose ulrecL uellvery pays 8s 1200 on
uecember 1 for a slxmonLh lnsurance premlum
on lLs dellvery vehlcle
1haL dlvldes ouL Lo be 8s 200 per monLh (8s 1200
6 monLhs) 8eLween uecember 1 and uecember
31 8s 200 worLh of lnsurance premlum ls used
up or explres
The expired amount will be reported as Insurance Expense on
December's income statement.
Monty asks Batliwala where the remaining Rs 1,000 of unexpired
insurance premium would be reported.
On the December 31 balance sheet, Batliwala tells him, in an
asset account called Prepaid Insurance.
CCS1 9kINCI9LL AND CCNSLkIA1ISM
MonLy learns LhaL each of hls companys asseLs was
recorded aL lLs otlqlool cost and even lf Lhe falr
markeL value of an lLem lncreases an accounLanL
wlll noL lncrease Lhe recorded amounL of LhaL asseL
on Lhe balance sheeL
1hls ls Lhe resulL of anoLher baslc accounLlng
prlnclple known as Lhe cost pr|nc|p|e
AlLhough accounLanLs generally do noL locteose Lhe
value of an asseL Lhey mlghL Jecteose lLs value as a
resulL of a concepL known as conservat|sm
lor example afLer a few monLhs ln buslness MonLy
may declde LhaL he can help ouL some cusLomers
as well as earn addlLlonal revenuesby carrylng an
lnvenLory of packlng boxes Lo sell
LeLs say LhaL ulrecL uellvery purchased 100 boxes
wholesale for 8e 100 each
Slnce Lhe Llme when MonLy boughL Lhem
however Lhe wholesale prlce of boxes has
been cuL by 40 and aL Lodays prlce he
could purchase Lhem for 8e 060 each
8ecause Lhe replacemenL cosL of hls
lnvenLory (8s 60) ls less Lhan Lhe otlqlool
tecotJeJ cosL (8s 100) Lhe prlnclple of
conservaLlsm dlrecLs Lhe accounLanL Lo
reporL Lhe lower amounL (8s 60) as Lhe
asseLs value on Lhe balance sheeL
ln shorL Lhe cosL prlnclple generally
prevenLs asseLs from belng reporLed aL
more Lhan cosL whlle conservaLlsm mlghL
requlre asseLs Lo be reporLed aL less Lhen
Lhelr cosL
CCS1 9kINCI9LL AND CCNSLkIA1ISM
DL9kLCIA1ICN
MonLy also needs Lo know LhaL Lhe reporLed
amounLs on hls balance sheeL for asseLs such as
equlpmenL vehlcles and bulldlngs are rouLlnely
reduced by depreclaLlon
uepreclaLlon ls requlred by Lhe baslc accounLlng
prlnclple known as Lhe match|ng pr|nc|p|e
uepreclaLlon ls used for asseLs whose llfe ls noL
lndeflnlLeequlpmenL wears ouL vehlcles
become Loo old and cosLly Lo malnLaln bulldlngs
age and some asseLs (llke compuLers) become
obsoleLe
uepreclaLlon ls Lhe allocaLlon of Lhe cosL of Lhe
asseL Lo Deprec|at|on Lxpense on Lhe lncome
sLaLemenL over lLs useful llfe
As an example assume LhaL ulrecL uellverys
van has a useful llfe of flve years and was
purchased aL a cosL of 8s 20000
1he accounLanL mlghL maLch 8s 4000 (8s
20000 3 years) of uepreclaLlon Lxpense
wlLh each years revenues for flve years
Lach year Lhe carry|ng amount of Lhe van wlll
be reduced by 8s 4000 (1he carrylng
amounLor book valuels reporLed on Lhe
balance sheeL and lL ls Lhe cosL of Lhe van
mlnus Lhe LoLal depreclaLlon slnce Lhe van
was acqulred)
1hls means LhaL afLer one year Lhe balance
sheeL wlll reporL Lhe carrylng amounL of Lhe
dellvery van as 8s 16000 afLer Lwo years Lhe
carrylng amounL wlll be 8s 12000 eLc AfLer
flve yearsLhe end of Lhe vans expecLed
useful llfelLs carrylng amounL ls zero
DL9kLCIA1ICN
MonLy wanLs Lo be cerLaln LhaL he
undersLands whaL 8aLllwala ls Lelllng hlm
regardlng Lhe asseLs on Lhe balance
sheeL so he asks 8aLllwala lf Lhe balance
sheeL ls ln effecL showlng whaL Lhe
companys asseLs are worLh
Pe ls surprlsed Lo hear 8aLllwala say LhaL
Lhe asseLs are oot reporLed on Lhe
balance sheeL aL Lhelr worLh (falr markeL
value)
LongLerm asseLs (such as bulldlngs
equlpmenL and furnlshlngs) are
reporLed aL Lhelr cosL mloos Lhe amounLs
already senL Lo Lhe lncome sLaLemenL as
uepreclaLlon Lxpense
DL9kLCIA1ICN
1he resulL ls LhaL a bulldlngs markeL value may
acLually have lncreased slnce lL was acqulred buL Lhe
amounL on Lhe balance sheeL has been cooslsteotly
teJoceJ as Lhe accounLanL moved some of lLs cosL Lo
uepreclaLlon Lxpense on Lhe lncome sLaLemenL ln
order Lo achleve Lhe maLchlng prlnclple
AnoLher asseL Cff|ce Lqu|pment may have a falr
markeL value LhaL ls much smaller Lhan Lhe carrylng
amounL reporLed on Lhe balance sheeL (AccounLanLs
vlew depreclaLlon as an ollocotloo process
allocaLlng Lhe cosL Lo expense ln order Lo maLch Lhe
cosLs wlLh Lhe revenues generaLed by Lhe asseL
AccounLanLs do oot conslder depreclaLlon Lo be
a volootloo process)
1he asseL Land ls noL depreclaLed so lL wlll appear aL
lLs orlglnal cosL even lf Lhe land ls now worLh one
hundred Llmes more Lhan lLs cosL
DL9kLCIA1ICN
0570.,943 |: your
fr|end when |t come:
to own|nq rento|
ShorLLerm (currenL) asseL amounLs are llkely Lo
be close Lo Lhelr markeL values slnce Lhey Lend
Lo Lurn over ln relaLlvely shorL perlods of Llme
8aLllwala cauLlons MonLy LhaL Lhe balance sheeL
reporLs only Lhe asseLs acqulred and only aL Lhe
cosL reporLed ln Lhe LransacLlon
1hls means LhaL a companys repuLaLlonas
excellenL as lL mlghL bewlll noL be llsLed as an
asseL
lL also means LhaL !eff 8ezos wlll noL appear as
an asseL on Amazoncoms balance sheeL nlkes
logo wlll noL appear as an asseL on lLs balance
sheeL eLc
MonLy ls surprlsed Lo hear Lhls slnce ln hls
oplnlon Lhese lLems are perhaps Lhe mosL
valuable Lhlngs Lhose companles have
8aLllwala Lells MonLy LhaL he has [usL learned an
lmporLanL lesson LhaL he should remember
when readlng a balance sheeL
DL9kLCIA1ICN
ALANCL SnLL1 LIAIL1ILS
1he balance sheeL reporLs ulrecL
uellverys ||ab|||t|es as of Lhe daLe noLed ln Lhe
headlng of Lhe balance sheeL
LlablllLles are obllgaLlons of Lhe company Lhey are
amounLs owed Lo oLhers as of Lhe balance sheeL daLe
8aLllwala glves MonLy some examples of llablllLles Lhe
loan he recelved from hls aunL (Notes 9ayab|e or Loan
ayable) Lhe lnLeresL on Lhe loan he owes Lo hls aunL
(Interest 9ayab|e) Lhe amounL he owes Lo Lhe supply
sLore for lLems purchased on credlL (Accounts
9ayab|e) Lhe wages he owes an employee buL hasnL
yeL pald Lo hlm (Wages 9ayab|e)
AnoLher llablllLy ls money recelved ln advance of
acLually eotoloq Lhe money lor example suppose
LhaL ulrecL uellvery enLers lnLo an agreemenL wlLh one
of lLs cusLomers sLlpulaLlng LhaL Lhe cusLomer prepays
8s 600 ln reLurn for Lhe dellvery of 30 parcels every
monLh for 6 monLhs
Assume ulrecL uellvery recelves
LhaL 8s 600 paymenL on uecember
1 for dellverles Lo be made beLween
uecember 1 and May 31 ulrecL
uellvery has a cash tecelpt of 8s 600
on uecember 1 buL lL does oot have
revenues of 8s 600 aL Lhls polnL
lL wlll have revenues only when
lL eotos Lhem by dellverlng Lhe
parcels Cn uecember 1 ulrecL
uellvery wlll show LhaL lLs
asseL Cash lncreased by 8s 600 buL
lL wlll also have Lo show LhaL lL has a
llablllLy of 8s 600 (lL has Lhe
lloblllty Lo dellver 8s 600 of parcels
wlLhln 6 monLhs or reLurn Lhe
money)
ALANCL SnLL1 LIAIL1ILS
1he llablllLy accounL lnvolved ln Lhe
8s 600 recelved on uecember 1
ls Dnearned kevenue
Lach monLh as Lhe 30 parcels are
dellvered ulrecL uellvery wlll be
earnlng 8s 100 and as a resulL
each monLh 8s 100 moves from Lhe
accounL unearned 8evenue
Lo Serv|ce kevenues
Lach monLh ulrecL uellverys
llablllLy decreases by 8s 100 as lL
fulfllls Lhe agreemenL by dellverlng
parcels and each monLh lLs
revenues on Lhe lncome sLaLemenL
lncrease by 8s 100
ALANCL SnLL1 LIAIL1ILS
8ALAnCL SPLL1
S1CCkPCLuL8S' LCul1?
lf Lhe company ls a corporaLlon Lhe Lhlrd secLlon of a
corporaLlons balance sheeL ls SLockholders LqulLy (lf Lhe
company ls a sole proprleLorshlp lL ls referred Lo as Cwners
LqulLy)
1he amounL of SLockholders LqulLy ls exacLly Lhe dlfference
beLween Lhe asseL amounLs and Lhe llablllLy amounLs
As a resulL accounLanLs ofLen refer Lo SLockholders LqulLy as
Lhe dlfference (or resldual) of asseLs mlnus llablllLles
SLockholders LqulLy ls also Lhe book value of Lhe
corporaLlon
Slnce Lhe corporaLlons asseLs are shown aL cosL or lower (and
noL aL Lhelr markeL values) lL ls lmporLanL LhaL you
do not assoclaLe Lhe reporLed amounL of SLockholders LqulLy
wlLh Lhe markeL value of Lhe corporaLlon (Pence lL ls a poor
cholce of words Lo refer Lo SLockholders LqulLy as Lhe
corporaLlons neL worLh)
1o flnd Lhe markeL value of a corporaLlon you should obLaln
Lhe servlces of a professlonal famlllar wlLh valulng buslnesses
WlLhln Lhe SLockholders LqulLy secLlon you may see
accounLs such as Common Stock 9a|d|n Cap|ta| |n
Lxcess of 9ar Ia|ueCommon Stock 9referred
Stock keta|ned Larn|ngs and Current ears Net
Income
1he accounL Common SLock wlll be lncreased when
Lhe corporaLlon lssues shares of sLock ln exchange
for cash (or some oLher asseL)
AnoLher accounL 8eLalned Larnlngs wlll lncrease
when Lhe corporaLlon earns a proflL 1here wlll be a
decrease when Lhe corporaLlon has a neL loss
1hls means LhaL revenues wlll auLomaLlcally cause
an locteose ln SLockholders LqulLy and expenses wlll
auLomaLlcally cause a Jecteose ln SLockholders
LqulLy
1hls lllusLraLes a llnk beLween a companys balance
sheeL and lncome sLaLemenL
8ALAnCL SPLL1
S1CCkPCLuL8S' LCul1?
S1A1LMLN1 CI CASn ILCWS
1he Lhlrd flnanclal sLaLemenL LhaL MonLy needs Lo
undersLand ls Lhe SLaLemenL of Cash llows
1hls sLaLemenL shows how ulrecL uellverys cash
amounL has changed durlng Lhe Llme lnLerval shown ln
Lhe headlng of Lhe sLaLemenL
MonLy wlll be able Lo see aL a glance Lhe cash
generaLed and used by hls companys operaLlng
acLlvlLles lLs lnvesLlng acLlvlLles and lLs flnanclng
acLlvlLles
Much of Lhe lnformaLlon on Lhls flnanclal sLaLemenL
wlll come from ulrecL uellverys balance sheeLs and
lncome sLaLemenLs
1he Lhree flnanclal reporLs LhaL 8aLllwala lnLroduced Lo
MonLyLhe lncome sLaLemenL Lhe balance sheeL and
Lhe sLaLemenL of cash flowsrepresenL one segmenL
of Lhe valuable ouLpuL LhaL good accounLlng sofLware
can generaLe for buslness owners
8aLllwala now explalns Lo MonLy Lhe baslcs of geLLlng
sLarLed wlLh recordlng hls LransacLlons
DCDLL LN1k SS1LM
1he fleld of accounLlngboLh Lhe
older manual sysLems and Lodays
baslc accounLlng sofLwarels
based on Lhe 300yearold
accounLlng procedure known
as doub|e entry
uouble enLry ls a slmple yeL
powerful concepL each and every
one of a companys LransacLlons
wlll resulL ln an amounL recorded
lnLo ot leost Lwo of Lhe accounLs ln
Lhe accounLlng sysLem
1nL CnAk1 CI ACCCDN1S
1o begln Lhe process of seLLlng up MonLy's accounLlng
sysLem he wlll need Lo make a deLalled llsLlng of all Lhe
names of Lhe accounLs LhaL ulrecL uellvery mlghL flnd
useful for reporLlng LransacLlons
1hls deLalled llsLlng ls referred Lo as a chart of accounts
(AccounLlng sofLware ofLen provldes sample charLs of
accounLs for varlous Lypes of buslnesses)
As he enLers hls LransacLlons MonLy wlll flnd LhaL Lhe
charL of accounLs wlll help hlm selecL Lhe Lwo (or more)
accounLs LhaL are lnvolved
Cnce MonLy's buslness beglns he may flnd LhaL he
needs Lo add more accounL names Lo Lhe charL of
accounLs or deleLe accounL names LhaL are never used
MonLy can Lallor hls charL of accounLs so LhaL lL besL
sorLs and reporLs Lhe LransacLlons of hls buslness
8ecause of Lhe double enLry sysLem all of ulrecL
uellverys LransacLlons wlll lnvolve a comblnaLlon of Lwo
or more accounLs from Lhe balance sheeL and/or Lhe
lncome sLaLemenL
8aLllwala llsLs ouL some sample accounLs LhaL MonLy
wlll probably need Lo lnclude on hls charL of
accounLs
8alance SheeL accounLs
AsseL accounLs (Lxamples Cash Accounts
kece|vab|e Supp||es and Lqu|pment)
LlablllLy accounLs (Lxamples Notes
9ayab|e Accounts 9ayab|e and Wages 9ayab|e)
SLockholders LqulLy accounLs (Lxamples Common
Stock keta|ned Larn|ngs)
lncome SLaLemenL accounLs
8evenue accounLs (Lxamples Serv|ce
kevenues Investment kevenues)
Lxpense accounLs (Lxamples Wages Lxpense kent
Lxpense Deprec|at|on Lxpense)
1nL CnAk1 CI ACCCDN1S
SAMLL 18AnSAC1lCnS
1o help MonLy really undersLand how Lhls works
8aLllwala lllusLraLes Lhe double enLry wlLh some
sample LransacLlons LhaL MonLy wlll llkely encounLer
Cn uecember 1 2010 MonLy sLarLs hls buslness
ulrecL uellvery vL LLd
1he flrsL LransacLlon LhaL MonLy wlll record for hls
company ls hls personal lnvesLmenL of 8s 20000 ln
exchange for 3000 shares of ulrecL uellverys
common sLock
ulrecL uellverys accounLlng sysLem wlll show an
lncrease ln lLs accounL Cash from zero Lo 8s 20000
and an lncrease ln lLs sLockholders equlLy accounL
Common SLock by 8s 20000
8oLh of Lhese accounLs are balance sheeL accounLs
1here are no revenues because oo dellvery fees
were eotoeJ by Lhe company and Lhere were no
expenses
18AnSAC1lCnS
AfLer MonLy enLers Lhls LransacLlon ulrecL
uellverys balance sheeL wlll look llke Lhls
D|rect De||very 9vt Ltd
a|ance Sheet
December 1 2010
Assets 8s L|ab|||t|es
Stockho|ders
Lqu|ty
8s
Cash 20000 LlablllLles
Shareholders'
LqulLy Common
SLock
20000
1ota| Assets 20000 1ota| L|ab|||t|es
Stockho|ders'
Lqu|ty
20000
ACCCun1lnC LCuA1lCn
8aLllwala asks !oe lf he can see LhaL Lhe balance
sheeL ls [usL LhaLlo bolooce MonLy looks aL Lhe
LoLal of 8s 20000 on Lhe asseL slde and looks aL
Lhe 8s 20000 on Lhe rlghL slde and says yes of
course he can see LhaL lL ls lndeed ln balance
8aLllwala shows MonLy someLhlng called
Lhe bas|c account|ng equat|on whlch he
explalns ls really Lhe same concepL as Lhe
balance sheeL lLs [usL presenLed ln an equaLlon
formaL
AsseLs LlablllLles + SLockholders (or Cwners) LqulLy
8s 20000 8s 0 + 8s 20000
1he accounLlng equaLlon (and Lhe balance sheeL)
should always be ln balance
DLI1S AND CkLDI1S
uld Lhe flrsL sample LransacLlon follow Lhe
double enLry sysLem and affecL Lwo or more
accounLs?
MonLy looks aL Lhe balance sheeL agaln and
answers yes boLh Cash and Common SLock
were affecLed by Lhe LransacLlon
8aLllwala lnLroduces Lhe nexL baslc accounLlng
concepL Lhe double enLry sysLem requlres LhaL
Lhe same amounL of Lhe LransacLlon musL be
enLered on boLh Lhe left slde of one accounL
and on Lhe tlqbt slde of anoLher accounL
lnsLead of Lhe word left accounLanLs use Lhe
word Jeblt and lnsLead of Lhe word tlqbt
accounLanLs use Lhe word cteJlt (1he
Lerms Jeblt and cteJlt are derlved from LaLln
Lerms used 300 years ago)
Debit means Ieft
Credit means right
MonLy asks 8aLllwala how he wlll know whlch accounLs
he should deblLmeanlng he should enLer Lhe numbers
on Lhe lefL slde of one accounLand whlch accounLs he
should credlLmeanlng he should enLer Lhe numbers
on Lhe rlghL slde of anoLher accounL
8aLllwala polnLs back Lo Lhe baslc accounLlng equaLlon
and Lell MonLy LhaL lf he memorlzes Lhls slmple
equaLlon lL wlll be easler Lo undersLand Lhe deblLs and
credlLs
Memor|z|ng the s|mp|e account|ng equat|on w||| he|p
you |earn the deb|t and cred|t ru|es for enter|ng
amounts |nto the account|ng records
LeLs Lake a look aL Lhe accounLlng equaLlon agaln
Assets L|ab|||t|es + Stockho|ders %or Cwners) Lqu|ty
DLI1S AND CkLDI1S
!usL as asseLs are on Lhe lefL slde (or deblL
slde) of Lhe accounLlng equaLlon Lhe asseL
accounLs ln Lhe general ledger have Lhelr
balances on Lhe lefL slde
1o locteose an asseL accounLs balance you
puL more on Lhe lefL slde of Lhe asseL
accounL ln accounLlng [argon yoo Jeblt tbe
osset occooot
1o Jecteose an asseL accounL balance
you cteJlt Lhe accounL LhaL ls you enLer
Lhe amounL on Lhe rlghL slde
!usL as llablllLles and sLockholders equlLy
are on Lhe rlghL slde (or credlL slde) of Lhe
accounLlng equaLlon Lhe llablllLy and
equlLy accounLs ln Lhe general ledger have
Lhelr balances on Lhe rlghL slde
DLI1S AND CkLDI1S
1o locteose Lhe balance ln a llablllLy or
sLockholders equlLy accounL you puL
more on Lhe rlghL slde of Lhe accounL
ln accounLlng [argon you credlL Lhe
llablllLy or Lhe equlLy accounL
1o Jecteose a llablllLy or equlLy you
deblL Lhe accounL LhaL ls you enLer
Lhe amounL on Lhe lefL slde of Lhe
accounL
As wlLh all rules Lhere are excepLlons
buL 8aLllwala's reference Lo Lhe
accounLlng equaLlon may help you Lo
learn wheLher an accounL should be
deblLed or credlLed
DLI1S AND CkLDI1S
CASP 18AnSAC1lCnS
Slnce many LransacLlons lnvolve cash
8aLllwala suggesLs LhaL MonLy memorlze
how Lhe Cash accounL ls affecLed when a
LransacLlon lnvolves cash lf ulrecL
uellvery tecelves cash Lhe Cash accounL ls
deblLed when ulrecL uellvery poys cash
Lhe Cash accounL ls credlLed
when o compony receives cosh the cosh
occount is debited
when the compony poys cosh the cosh
occount is credited
LxAMLL Cl CASP 18AnSAC1lCn
8aLllwala refers Lo Lhe example of uecember 1 Slnce
ulrecL uellvery recelved 8s 20000 lo cosb from
MonLy ln exchange for 3000 shares of common
sLock one of Lhe accounLs for Lhls LransacLlon ls Cash
Slnce cash was tecelveJ Lhe Cash accounL wlll
be JeblteJ
ln keeplng wlLh double enLry Lwo (or more) accounLs
need Lo be lnvolved 8ecause Lhe flrsL accounL (Cash)
was JeblteJ Lhe second accounL needs Lo
be cteJlteJ
All MonLy needs Lo do ls flnd Lhe rlghL accounL Lo
credlL ln Lhls case Lhe second accounL ls Common
SLock Common sLock ls parL of sLockholders equlLy
whlch ls on Lhe rlghL slde of Lhe accounLlng equaLlon
As a resulL lL should have a credlL balance and Lo
lncrease lLs balance Lhe accounL needs Lo be cteJlteJ
AccounLanLs lndlcaLe accounLs and amounLs uslng Lhe followlng
formaL
LxAMLL Cl CASP 18AnSAC1lCn
AccounLanLs usually flrsL show Lhe accounL and amounL Lo be deblLed
Cn Lhe nexL llne Lhe accounL Lo be credlLed ls lndenLed and Lhe
amounL appears furLher Lo Lhe rlghL Lhan Lhe deblL amounL shown ln
Lhe llne above
1hls enLry formaL ls referred Lo as a general [ournal enLry
Account Name Deb|t Cred|t
Cash 20000
Common Stock 20000
SAM9LL 1kANSAC1ICN #2
8aLllwala lllusLraLes for MonLy a second
LransacLlon Cn uecember 2 ulrecL uellvery
purchases a used dellvery van for 8s 14000 by
wrlLlng a cheque for 8s 14000
1he Lwo accounLs lnvolved are Cash and vehlcles
(or De||very Lqu|pment) When Lhe cheque ls
wrlLLen Lhe accounLlng sofLware wlll
auLomaLlcally make Lhe enLry lnLo Lhese Lwo
accounLs
8aLllwala explalns Lo MonLy whaL ls happenlng
wlLhln Lhe sofLware Slnce Lhe company poys 8s
14000 Lhe Cash accounL ls credlLed
So we know LhaL Lhe Cash accounL wlll
be cteJlteJ for 8s 14000 and we know Lhe oLher
accounL wlll have Lo be JeblteJ for 8s 14000
We need only ldenLlfy Lhe besL accounL Lo deblL
ln Lhls case we choose vehlcles (or uellvery LqulpmenL)
and Lhe enLry ls
1he balance sheeL wlll look llke Lhls afLer Lhe vehlcle
LransacLlon ls recorded
Account Name Deb|t Cred|t
Ieh|c|es 14000
Cash 14000
D|rect De||very 9vt Ltd
a|ance Sheet
December 2 2010
Assets L|ab|||t|es Stockho|ders
Lqu|ty
ash Rs 6,000 Liabilities
Vehicles 14,000
Stockholders' Equity
ommon Stock
Rs 20,000
TotaI Assets Rs 20,000
TotaI Liab. & StockhoIders'
Equity
Rs 20,000
SAM9LL 1kANSAC1ICN #3
1he Lhlrd sample LransacLlon also occurs on
uecember 2 when MonLy conLacLs an lnsurance
agenL regardlng lnsurance coverage for Lhe
vehlcle ulrecL uellvery [usL purchased
1he agenL lnforms hlm LhaL 8s 1200 wlll provlde
lnsurance proLecLlon for Lhe nexL slx monLhs
MonLy lmmedlaLely wrlLes a cheque for 8s 1200
and malls lL ln
LeLs conslder Lhls LransacLlon uslng double
enLry we know Lhere musL be a mlnlmum of Lwo
accounLs lnvolvedone (or more) of Lhe accounLs
musL be JeblteJ and one (or more) musL
be cteJlteJ
Slnce a cheque ls wrlLLen we know LhaL one of
Lhe accounLs lnvolved ls Cash Slnce cash
was polJ Lhe Cash accounL wlll be cteJlteJ
Whlle we have noL yeL ldenLlfled Lhe second
accounL whaL we do know for cerLaln ls LhaL Lhe
second accounL wlll have Lo be JeblteJ
AL Lhls polnL we have mosL of Lhe enLryall we are mlsslng
ls Lhe oome of Lhe accounL Lo be deblLed
We know Lhe LransacLlon lnvolves lnsurance and a qulck
look Lhrough Lhe charL of accounLs reveals Lwo posslblllLles
9repa|d Insurance (an asseL accounL reporLed on Lhe
balance sheeL)
Insurance Lxpense (an expense accounL reporLed on Lhe
lncome sLaLemenL)
AsseLs lnclude cosLs LhaL are noL yeL explred (noL yeL used
up) whlle expenses are cosLs LhaL have explred (have been
used up) Slnce Lhe 8s 1200 paymenL ls for an expense LhaL
wlll noL explre ln lLs enLlreLy wlLhln Lhe currenL monLh lL
would be loglcal Lo deblL Lhe accounL repald lnsurance (AL
Lhe end of each monLh when 8s 200 has explred 8s 200 wlll
be moved from repald lnsurance Lo lnsurance Lxpense)
Account Name Deb|t Cred|t
??? 1,200
Cash 1,200
SAM9LL 1kANSAC1ICN #3
1he enLry ln Lhe general [ournal formaL ls
AfLer Lhe flrsL Lhree LransacLlons have been
recorded Lhe balance sheeL wlll look llke Lhls
Account Name Debit Credit
Prepaid Insurance 1,200
Cash 1,200
D|rect De||very 9vt Ltd
a|ance Sheet
December 2 2010
Assets L|ab|||t|es Stockho|ders
Lqu|ty
Cash Rs 4,800
LlablllLles
Prepaid Insurance 1,200
Stockholders' Equity
ommon Stock
Rs 20,000
VehicIes 14,000
TotaI Assets
Rs 20,000
Rs 20,000
SAM9LL 1kANSAC1ICN #3
Agaln Lhe balance sheeL and Lhe
accounLlng equaLlon are ln
balance and all of Lhe changes
occurred on Lhe asseL/lefL/deblL
slde of Lhe accounLlng equaLlon
LlablllLles and SLockholders
LqulLy were noL affecLed by Lhe
lnsurance LransacLlon
SAM9LL 1kANSAC1ICN #3
SAM9LL 1kANSAC1ICN #4
1he fourLh LransacLlon occurs on uecember 3 when a
cusLomer glves ulrecL uellvery a cheque for 8s 10 Lo
dellver Lwo parcels on LhaL day
8ecause of double enLry we know Lhere musL be a
mlnlmum of Lwo accounLs lnvolvedone of Lhe accounLs
musL be deblLed and one of Lhe accounLs musL be
credlLed
8ecause ulrecL uellvery tecelveJ 8s 10 lL musL Jeblt Lhe
accounL Cash lL musL also cteJlt a second accounL for 8s
10
1he second accounL wlll be Servlce 8evenues an lncome
sLaLemenL accounL 1he reason Servlce 8evenues
ls cteJlteJ ls because ulrecL uellvery musL reporL LhaL
lL eotoeJ 8s 10 (noL because lL recelved 8s 10)
8ecordlng revenues when Lhey are earned resulLs from a
baslc accounLlng prlnclple known as Lhe revenue
recognlLlon prlnclple 1he followlng Llp reflecLs LhaL
prlnclple
evenues occounts ore credited when the
compony eorns o fee {or se//s merchondise)
reqord/ess of whether cosh is received ot the
time
Pere are Lhe Lwo parLs of Lhe LransacLlon as
Lhey would look ln Lhe general [ournal formaL
SAM9LL 1kANSAC1ICN #4
Account Name Debit Credit
Cash 10
Service Revenues 10
SAM9LL 1kANSAC1ICN #S
LeLs assume LhaL on uecember 3 Lhe
company geLs lLs second cusLomera local
company LhaL needs Lo have 30 parcels
dellvered lmmedlaLely
MonLys prlce of 8s 230 ls very appeallng so
MonLys company ls hlred Lo dellver Lhe
parcels
1he cusLomer Lells MonLy Lo submlL an
lnvolce for Lhe 8s 230 and Lhey wlll pay lL
wlLhln seven days
MonLy dellvers Lhe 30 parcels on uecember
3 as agreed meanlng LhaL on uecember 3
ulrecL uellvery has eotoeJ 8s 230
Pence Lhe 8s 230 ls reporLed as revenues
on ecembet J even Lhough Lhe company
dld noL recelve any cash on LhaL day
1he effott needed Lo compleLe Lhe [ob was
done on uecember 3 (ueposlLlng Lhe check
for 8s 230 ln Lhe bank when lL arrlves seven
days laLer ls noL consldered Lo Lake any
efforL)
LeLs ldenLlfy Lhe Lwo accounLs lnvolved and
deLermlne whlch needs a deblL and whlch
needs a credlL
8ecause ulrecL uellvery has earned Lhe
fees one accounL wlll be a revenues
accounL such as Servlce 8evenues (lf you
refer back Lo Lhe lasL 1I9 you wlll read LhaL
revenue accounLs such as Servlce
8evenuesare usually credlLed meanlng
Lhe second accounL wlll need Lo be
deblLed)
SAM9LL 1kANSAC1ICN #S
ln Lhe general [ournal formaL heres whaL we have
ldenLlfled so far
We know LhaL Lhe unnamed accounL cannoL be Cash
Agaln reporLlng revenues when Lhey are earned
resulLs from Lhe baslc accounLlng prlnclple known as
Lhe revenue recogn|t|on pr|nc|p|e
Account Name Debit Credit
250
Service Revenues 250
Account Name Deb|t Cred|t
Accounts ReceivabIe 250
Service Revenues 250
SAM9LL 1kANSAC1ICN #S
Samp|e 1ransact|on #6
lor slmpllclLy leLs assume LhaL Lhe only
expense lncurred by ulrecL uellvery so far was
a fee Lo a Lemporary help agency for a person
Lo help MonLy dellver parcels on uecember 3
1he Lemp agency fee ls 8s 80 and ls due by
uecember 12
lf a company does noL pay cash lmmedlaLely
you cannoL credlL Cash
8uL because Lhe company owes someone Lhe
money for lLs purchase we say lL has
an ob||gat|on or ||ab|||ty Lo pay
MosL accounLs lnvolved wlLh obllgaLlons have
Lhe word payable ln Lhelr name and one of
Lhe mosL frequenLly used accounLs ls AccounLs
ayable
Also keep ln mlnd LhaL expenses are almosL
always JeblteJ
1he accounLs and amounLs for Lhe
Lemporary help are
penses ore {o/most) o/woys debited
lf o compony does not poy cosh riqht owoy
for on epense or for on osset you connot
credit cosh 8ecouse the compony owes
someone the money for its purchose we
soy it hos on ob/iqotion or /iobi/ity to poy
1he most /ike/y /iobi/ity occount invo/ved in
business ob/iqotions is 4ccounts Poyob/e
Account Name Deb|t Cred|t
1emporary Pelp Lxpense 80
AccounLs ayable 80
Samp|e 1ransact|on #6
8evenues and expenses
appear on Lhe lncome
sLaLemenL as shown below
Samp|e 1ransact|on #6
D|rect De||very 9vt Ltd
Income Statement
Ior the 1hree Days Lnded December 3 2010
Servlce 8evenues 8s 260
1emporary Pelp Lxpense 80
neL lncome 8s 180
AfLer Lhe enLrles Lhrough uecember 3 have been
recorded Lhe balance sheeL wlll look llke Lhls
D|rect De||very 9vt Ltd
a|ance Sheet
December 3 2010
Assets L|ab|||t|es
Stockho|ders Lqu|ty
Cash ks 4810 L|ab|||t|es
Accounts kece|vab|e 2S0 Accounts 9ayab|e
ks 80
9repa|d Insurance 1200 Stockho|ders Lqu|ty
Ieh|c|es 14000 Common Stock
20000
keta|ned Larn|ngs
180
1ota| Stockho|ders
Lqu|ty
20180
1ota| Assets ks 20260
1ota| L|ab
Stockho|ders Lqu|ty ks 20260
Samp|e 1ransact|on #6
noLlce LhaL Lhe yeartodate net |ncome (boLLom
llne of Lhe lncome sLaLemenL) lncreased
SLockholders LqulLy by Lhe same amounL 8s 180
1hls connecLlon beLween Lhe lncome sLaLemenL and
balance sheeL ls lmporLanL
lor one lL keeps Lhe balance sheeL and Lhe
accounLlng equaLlon ln balance
Secondly lL demonsLraLes LhaL revenues wlll cause
Lhe sLockholders equlLy Lo lncrease and expenses
wlll cause sLockholders equlLy Lo decrease
AfLer Lhe end of Lhe year flnanclal sLaLemenLs are
prepared you wlll see LhaL Lhe lncome sLaLemenL
accounLs (revenue accounLs and expense accounLs)
wlll be closed or zeroed ouL and Lhelr balances wlll
be Lransferred lnLo Lhe keta|ned Larn|ngs accounL
1hls wlll mean Lhe revenue and expense accounLs
wlll sLarL Lhe new year wlLh zero balancesallowlng
Lhe company Lo keep score for Lhe new year
Samp|e 1ransact|on #6
MCn1?'S LLA8nlnCS
8aLllwala suggesLed LhaL perhaps Lhls lnLroducLlon was enough maLerlal for Lhelr
flrsL meeLlng Pe wroLe ouL Lhe followlng noLes summarlzlng for MonLy Lhe
lmporLanL polnLs of Lhelr dlscusslon
When a company poys cash for someth|ng Lhe company wlll cteJlt Cash and wlll
have Lo Jeblt a second accounL Assumlng LhaL a company
prepares mootbly flnanclal sLaLemenLs
lf Lhe amounL ls used up or wlll explre ln Lhe currenL monLh Lhe accounL Lo be
deblLed wlll be an expense accounL (Advert|s|ng Lxpense kent Lxpense and
Wages Lxpense ls Lhree examples)
lf Lhe amounL ls oot used up or does oot explre ln Lhe currenL monLh Lhe accounL
Lo be deblLed wlll be an asseL accounL (Lxamples are 9repa|d
Insurance Supp||es 9repa|d kent 9repa|d Advert|s|ng 9repa|d Assoc|at|on
Dues Land u||d|ngs and Lqu|pment)
lf Lhe amounL reduces a companys obllgaLlons Lhe accounL Lo be deblLed wlll be a
llablllLy accounL (Lxamples lnclude Accounts 9ayab|e Notes 9ayab|e Wages
9ayab|e and Interest 9ayab|e)
When a company receives cash Lhe company wlll Jeblt Cash and wlll have
Lo credlL anoLher accounL Assumlng LhaL a company wlll
prepare mootbly flnanclal sLaLemenLs
lf Lhe amounL recelved ls from a cash sale or for a servlce LhaL has [usL been
performed buL has noL yeL been recorded Lhe accounL Lo be credlLed ls a
revenue accounL such as Serv|ce kevenues or Iees Larned
lf Lhe amounL recelved ls an advance paymenL for a servlce LhaL has noL yeL
been performed or earned Lhe accounL Lo be cteJlteJ ls Dnearned
kevenue
lf Lhe amounL recelved ls a paymenL from a cusLomer for a sale or servlce
dellvered earller and has already been recorded as revenue Lhe accounL Lo
be credlLed ls Accounts kece|vab|e
lf Lhe amounL recelved ls Lhe proceeds from Lhe company slgnlng a
promlssory noLe Lhe accounL Lo be credlLed ls Notes 9ayab|e
lf Lhe amounL recelved ls an lnvesLmenL of addlLlonal money by Lhe owner
of Lhe corporaLlon a sLockholders equlLy accounL such as Common Stock ls
credlLed
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8evenues are recorded as Servlce 8evenues or Sales when Lhe servlce
or sale has been performed oot when Lhe cash ls recelved 1hls
reflecLs Lhe baslc accounLlng prlnclple known as Lhe revenue
recognlLlon prlnclple
Lxpenses are maLched wlLh revenues or wlLh Lhe perlod of Llme
shown ln Lhe headlng of Lhe lncome sLaLemenL oot ln Lhe perlod
when Lhe expenses were pald 1hls reflecLs Lhe baslc accounLlng
prlnclple known as Lhe match|ng pr|nc|p|e
1he flnanclal sLaLemenLs also reflecL Lhe baslc accounLlng prlnclple
known as Lhe cost pr|nc|p|e 1hls means asseLs are shown on Lhe
balance sheeL aL Lhelr otlqlool cosL or less and noL aL Lhelr currenL
value
1he lncome sLaLemenL expenses also reflecL Lhe cosL prlnclple lor
example Lhe depreclaLlon expense ls based on Lhe otlqlool cost of
Lhe asseL belng depreclaLed and oot on Lhe currenL replacemenL
cosL
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