Let’s walkthrough an example:

An accounting firm provides accounting services for a customer in the month of January and invoices the customer on January 31 for 1,000,000 Rwf. 

The customer agrees to pay by February 28.

When the company invoices 1,000,000 Rwf, what is the impact on the accounting equation?

On the date we invoice the customer, the company “earns” the revenue then recognizes the revenue (equity).  However, it has not yet received cash, instead it has an account receivable (asset) since the customer owes money.

Qs: What is the impact on the accounting equation?

When we invoice the customer, we earn the revenue and need to recognize the revenue (increase in equity).

Since we have not yet received the cash, we increase the accounts receivable asset account

We increase accounts receivable (asset), so we debit

We increase revenue (revenue/equity), so we credit

Note: Error in student workbook. Should say revenue/equity and not asset

Qs: What is the associated journal entry?

It is now the end of February and the company has received a cash payment from the customer for the invoice of 1,000,000 Rwf.  What is the impact on the accounting equation?

+1,000,000

-1,000,000

The company receives cash (asset) and no longer has an account receivable (asset).  There is no impact on equity in February because the revenue has already been earned in January.

Qs: What is the impact on the accounting equation?

Once we receive the cash, we are essentially exchanging one asset for another.

We increase cash (asset), so we debit

We decrease accounts receivable (asset), so we credit

At the end of February, the accounts receivable balance is now 0.

Qs: What is the associated journal entry?