 Hello, in this presentation we will record transactions related to accounts receivable, recording the transactions using the double entry accounting system in the format of the accounting equation that equation of assets equal liabilities plus equity. Objectives, at the end of this we will be able to list transactions involving accounts receivable and record transactions involving accounts receivable using the accounting equation. We will go through some examples of the accounting equation and recording transactions related to accounts receivable. Quick review of the accounting equation, we have assets equal liabilities plus equity as the accounting equation. We then need to start memorizing those accounts that fit into those subcategories of assets, liabilities and equity. Those being in terms of assets for this problem, cash, accounts receivable, supplies, all assets. We will be focusing here on accounts receivable, looking at that accounts receivable cycle and therefore these transactions will basically be selling something on accounts and then receiving payment at a later time. In terms of liabilities we just have the accounts payable and within the equity section remember that we have the capital account and the entire income statement which includes revenue and expenses. If this were a corporation rather than a sole proprietor, this capital account would be something like common stock, retained earnings and we would still have revenue and expenses meaning the entire income statement is part of the equity section. Then we're going to see that total assets of course will equal total liabilities and we can look at the impact on net income meaning the impact on revenue minus expenses. First transaction we're going to say that we performed work on account no cash received. Now typically when we first start looking at the recording of these transactions we're not going to be looking at a company that sells stuff where you have a service company so therefore we're going to be a law firm or a bookkeeping firm and we've done work you can imagine work being done and us basically invoicing the client. That will be the typical flow of many types of industries so those types of industries where we do work and then invoice the client would be this type of transaction. What happens then is we invoice the client and the client basically has an IOU at this point in time. Nothing tangible has taken place other than possibly an invoice going from us to the client but no money has taken place the services have been completed. So at that point in time then we haven't received cash but we have got something we've got this IOU and that of course will be the accounts receivable item here so we're going to say the receivable is going up due to the fact that we are owed money then we need to know what the other side of the transaction will be why will people be paying us money this ten thousand sometime in the future because we have earned it and the act of earning is under the revenue recognition principle the time and the point at which we recognize revenue revenue over here on the equity sides we have revenue on the equity side we know if that receivable went up then the revenue to must be going up so I'm going to increase revenue on this side as well if we also want to think through that however and say well revenue revenue only really goes up meaning if this is a customer that we never really pay customers money never really goes the other way to us paying customers it only goes this way the customer is going to pay us we do work for customers and therefore the revenue is going to only increase it also has to increase because it's going to increase the amount of total equity so we can kind of double check ourselves in terms of the accounting equation knowing that this will increase and in terms of just looking at that account analyzing that account and seeing that it increases in that format as well also note that some people don't like the idea of recording revenue and an asset before we receive cash thinking that we're kind of recording something before we have earned it but realized that we are receiving something here meaning this receivable has value in that we believe we're going to get paid within 30 to 60 days and therefore if we went to a bank and we were giving someone a bank loan this is important information the bank needs to know the money that we are going to receive that's important information to decision-making as to whether a loan will be given now if this loan is not likely to if we have accounts receivable here and it's not likely to be paid then we're going to have to deal with we're going to have to tell our readers of the financial statements that in some way we'll deal with that at a future point that is something that it's a concern that we have to deal with but note that this is a receivable that's not as valuable with cash and that there's more risk involved to it but it still is a receivable just as putting money into a stock market isn't as solid as having the cash although there's better ability for gain that's why you put it there but it's not as guaranteed as cash but we still are going to record it hoping out you know that there is a likelihood that we will receive it and it is therefore an asset the revenue we're going to record at the point in time that we have earned it whether we have received payment or not we see the transaction here then we're going to have accounts receivable increasing and we're going to have assets therefore going up and we see that the revenue is increasing that will increase the equity no effect on the liability section therefore the total assets of this transactions including just the accounts receivable is equal to the liabilities plus equity we also note that net income is going up at this point in time that happening because revenue went up and revenue minus expenses means that net income is going up by that 10,000 next piece we're going to say that we received cash on account for work done in the past now remember when we work with these transactions we're going to have to look at the beginning balance so now we have something happened prior to this meaning we have this prior balance here which which just includes the prior transaction we're going to record the current transaction and then we will have the total transaction we're going to have to add those two up so when we look at this transaction we're going to ask our question is cash affected and we're going to say yeah we received cash received cash that's always going to be the keyword typically a problem in a book problem we'll say something like that that we received it in real life obviously it would be obvious we would receive a check in the mail or something like that in a book problem we would have to read that and interpret it notes also that we see we may see something like on account which typically makes us think accounts receivable or accounts payable and it may may you make you think like it does too many that cash isn't involved because typically when we see accounts on account it means that we're possibly receiving payment without cash note that this is the second transaction however so if we were to buy if we were to do work on account no cash happened we did work as we did in the prior transaction and we had not yet received cash but if we receive cash on account that's the second half of the transaction that means both cash and the accounts receivable in this case will be affected so if we go through our questions and ask is cash affected that's usually the best way to start and we're just gonna yeah cash is affected we received it therefore we're gonna say cash is gonna increase and then we just need to see what the other side of the transaction is we see that we are are getting 10,000 from the client and therefore might believe that that should be revenue but looking at the prior transaction revenue had already been recorded and the reason is because of course we did the work in the past we're not doing the work at this point in time we are just receiving the payment at this point in time therefore the other account affected is receivable the amount showing that people owe us money people owe us 10,000 they're not gonna owe us 10,000 after they pay us 10,000 and therefore this receivable must be the other side going down so if we to look at the transaction it would look like this we're gonna say cash is gonna increase receivable then is gonna decrease so the asset then is going up and down we have an asset going up asset going down no effect on liabilities or equity so this is one of those transactions which is a bit confusing in terms of the accounting equation because there's no net effect on the total assets or the liabilities and equity sides no effect therefore on income because one asset is going up and one asset is going down in essence we got a better asset and we lost the worser asset here we lost people owing us money people no longer owe us money because they paid us the money remember what the receivable account is doing is just tracking it's just tracking who owes us money then we we're gonna calculate the balance here and we're just gonna bring the balances down so we're just saying this is our prior balance this is the current activity this is our total prior balance was zero ten thousand increase in cash total is ten thousand prior balance in accounts receivable is ten thousand we decreased it ten thousand current balance is zero no other activity in any of the other accounts and of course we are back in balance total assets equaling total liabilities plus equity note that this is just the normal transactions that's gonna happen if we went on and on with the accounts receivable if we were working in the accounts receivable department it should always look like this we're gonna say receivable is gonna go up and then receivable is gonna be paid and then receivable is gonna go up and paid it may not be right next to each other in time meaning we might have multiple receivables between this ten thousand and then payment might happen way down here somewhere but typically hopefully we're gonna have work done receivables increasing and then of course the payments being received receivables then decreasing at the time of payment objectives we are now able to list transactions involving accounts receivable and record transactions involving accounts receivable using the accounting equation