Worked-example setupScope and assumptions
- Northline Studio is a new sole proprietorship that begins with $20,000 Cash and a $20,000 balance in Owner, Capital; all other listed accounts begin at zero.
- The cancellable supplies order alone creates no asset or obligation under the stated terms.
- Northline accepts the supplies at delivery and becomes obligated to pay the stated price.
- The customer advance creates an obligation because Northline has not yet performed the promised service.
- Period
- One reporting month
- Units
- USD
- Rounding
- Whole US dollars; no rounding required
Problem
Northline Studio is a new design firm organized as a sole proprietorship. It begins the month with $20,000 Cash and a $20,000 balance in Owner, Capital. Northline places a cancellable order for supplies, later accepts $4,000 of supplies on credit, and pays $1,500 of the payable. It performs $6,000 of customer work on credit and collects $2,000. Northline also pays $1,000 for current utility service, receives a $3,000 customer advance for future work, and borrows $5,000 from a bank. Determine which events are recorded and the ending totals for assets, liabilities, and equity. Assume the order is an ordinary unperformed purchase commitment, control passes when the supplies are accepted, and completed customer work gives an unconditional right to payment. There are no other opening balances or events.
Event map
The order does not require a recorded purchase under the stated facts. Neither party has performed the exchange. The later events classify as follows:
| Event | Accounts changed | Classification |
|---|---|---|
| Supplies delivered | Supplies; Accounts Payable | Asset and liability increase |
| Supplier paid | Cash; Accounts Payable | Asset and liability decrease |
| Service on credit | Accounts Receivable; Service Revenue | Asset and equity increase |
| Receivable collected | Cash; Accounts Receivable | Asset exchange |
| Current utility service paid | Cash; Utilities Expense | Asset and equity decrease |
| Customer advance received | Cash; Unearned Revenue | Asset and liability increase |
| Bank loan received | Cash; Note Payable | Asset and liability increase |
Recomputed ending accounts
Cash $27,500
Supplies 4,000
Accounts Receivable 4,000
Total assets 35,500
Accounts Payable 2,500
Unearned Revenue 3,000
Note Payable 5,000
Total liabilities 10,500
Opening equity 20,000
Revenue effects 6,000
Expense effects (1,000)
Total equity 25,000
The amounts satisfy the accounting equation:
$35,500 assets = $10,500 liabilities + $25,000 equity
Interpretation
Northline records $6,000 of revenue when it performs the work, even though it collects only $2,000 during the month. The separate $3,000 receipt is a customer advance, not revenue, because Northline still owes the promised work. The bank loan also increases Cash without increasing revenue.
The account balances provide detail beyond the three equation totals. Accounts Receivable shows the $4,000 still due from a customer. Unearned Revenue shows $3,000 of work Northline still owes. Accounts Payable and Note Payable show two different obligations.
Common wrong paths
- Record the supplies order immediately: This assumes rights and obligations that require recording the full purchase before either party performs.
- Record $2,000 revenue at collection: The revenue arose from the $6,000 service; collection changed the asset form.
- Record the $3,000 advance as revenue: Northline has not yet performed the promised work, so it still has a liability.
- Record expense when the supplier is paid: The payment settles the payable. The supplies remain an asset under the stated facts.
- Record the bank loan as revenue: The loan creates a repayment obligation, not revenue from customer work.
Verified calculation · accounting equation
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- events
- 7 items
Inspect data
[
{
"asset_changes": {
"supplies": 4000
},
"equity_changes": {},
"label": "supplies delivered on credit",
"liability_changes": {
"accounts_payable": 4000
}
},
{
"asset_changes": {
"cash": -1500
},
"equity_changes": {},
"label": "partial payment of supplier payable",
"liability_changes": {
"accounts_payable": -1500
}
},
{
"asset_changes": {
"accounts_receivable": 6000
},
"equity_changes": {
"revenue_effect": 6000
},
"label": "customer service performed on credit",
"liability_changes": {}
},
{
"asset_changes": {
"accounts_receivable": -2000,
"cash": 2000
},
"equity_changes": {},
"label": "partial collection of receivable",
"liability_changes": {}
},
{
"asset_changes": {
"cash": -1000
},
"equity_changes": {
"expense_effect": -1000
},
"label": "current utilities paid",
"liability_changes": {}
},
{
"asset_changes": {
"cash": 3000
},
"equity_changes": {},
"label": "customer cash received before performance",
"liability_changes": {
"customer_advance": 3000
}
},
{
"asset_changes": {
"cash": 5000
},
"equity_changes": {},
"label": "cash borrowed from bank",
"liability_changes": {
"note_payable": 5000
}
}
]- opening
- 3 fields
Inspect data
{
"assets": {
"accounts_receivable": 0,
"cash": 20000,
"supplies": 0
},
"equity": {
"expense_effect": 0,
"owners_equity": 20000,
"revenue_effect": 0
},
"liabilities": {
"accounts_payable": 0,
"customer_advance": 0,
"note_payable": 0
}
}Recomputed result
| Measure | Value |
|---|---|
| accounts receivable | 4,000 |
| cash | 27,500 |
| equation difference | 0 |
| equity expense effect | -1,000 |
| equity owners equity | 20,000 |
| equity revenue effect | 6,000 |
| liability accounts payable | 2,500 |
| liability customer advance | 3,000 |
| liability note payable | 5,000 |
| supplies | 4,000 |
| total assets | 35,500 |
| total equity | 25,000 |
| total liabilities | 10,500 |