Alright, in our previous example the Smiths owed us $5,000 for catering provided for a funeral, and were going to pay this at the end of April.
g) The Smiths pay the full amount owed to George’s Catering on the 30th of April. Now what do we do?
Well, the easiest part of this transaction is that we receive cash (of $5,000). So bank goes up. But what happens with our debtor? Our debtor (asset) exists currently in our records at $5,000. If the Smiths are now paying us, does this mean that they owe us less, or more, or that there is no change?
Answer: They owe us less. In fact, they don’t owe us anything now.
So we increase our cash by $5,000, and we decrease our debtors by the same figure to zero.
George’s Catering still consists of assets of $35,000, but this is now made up of baking equipment to the value of $12,000, and $23,000 cash.
The debtor amounts to zero dollars – this makes sense as we are showing that the debt towards George’s Catering no longer exists.
As you can clearly see here, income is not the same as cash. Income isthe event itself. The cash is a separate element of accounting. Income is the event that takes place that results (either immediately or later on) in more assets for your business.
The income did (eventually) result in more cash for the business – as it should.
IMPORTANT: Do not move forward if you're even a little confused. Instead, take a step back to the previous lesson or back to the simpler example of cash income in the lesson entitled Define Income.
Go over these lessons again. If you're still having trouble, return to earlier sections you didn't feel very cool about, even things early on in the section on Basic Accounting Concepts. See if you can spot anything you didn't quite get the first time. Then return to this lesson and review it once again.
When you're comfortable with the concepts we just went over, move forward.