In this lesson we're going to go through our previous example for our sample business, George's Catering, and work out the full journal entry for income when it is received immediately in cash.
e) Now George’s Catering provides catering services for a wedding. George gets $10,500 from this job in cash.
As usual, we're first going to look at which accounts would be affected in this transaction and the impact on our accounting equation. Then after that we'll work out the double entry.
Here's how our basic accounting equation would be affected:
The easiest part of this transaction to figure out is that cash (or our bank account) has been affected.
Cash or bank has increased.
Cash or bank is an asset. Assets increase on the debit side of our equation (left) and decrease on the credit side (right).
So this means that we debit our bank account.
Now, what is the credit entry? Or to put it another way, what is the source of this increase in cash?
The answer is the income. George's Catering has made income, and this is worth $10,500.
Remember, more income (1) means more profit, which means more for the owner (2). Income thus comes into being (and increases) on the same side as the owner’s equity – namely the right side (credit).
The full journal entry for income received immediately in cash is:
Remember, in accounting we don't just list "income" as the account, instead we list the exact type of income that took place, which in this case is "services rendered."
Another important note: remember that income is not the assets (i.e. cash) you get from, for example, rendering services. It is the event itself (the rendering of the service) that results in cash coming in (immediately or at a later stage).
The cash is the asset part of the transaction. Income is the event that takes place that results in more assets being owned by the owner.
Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.
Important: The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.
If you are having any difficulty understanding this example of income, return to our earlier lesson called Define Income where we go over in detail what income is and how it fits in with the accounting equation.
Or if you're generally struggling to do debits and credit journal entries, return to our popular lesson, Debits and Credits: what they really mean.
If you're feeling good about double entries, feel free to move on to our next lesson, where we'll go over an example of income where we don't receive the cash straight away (i.e. a credit transaction). Click here for our accrued income journal entry tutorial.
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