accounting equation

PepsiMax Registered, AAT Student Posts: 9

I do not understand this question. I checked the answer I do not understand why capital is increased. I thought Income would increase.


  • Pian32
    Pian32 MAAT Posts: 471
    You already have recieved the money for the income presented. This means that in the previous years accounts it'll be a liability as you owe the service for that income as well as an asset (money going into your account).

    When you reverse the income you decrease the liability (service rendered) but it doesn't alter any assets (that was done when the money went into the bank in the last quarter) this means to balance the capital increases.

    You are correct that income increases but that doesn't make it an asset in all cirumstances.

    Here's a small example:

    I pay you £300 in advance for services. You have from this:
    Asset : £300 (Money in bank)
    Liability : £300 (Still owe the service)

    When you deliver on those services:
    Asset: £300 (Money still in bank)
    Liability : £0

    Use the capital equation and you can see what has happened.
    1) Capital = 300 - 300 = 0
    2) Capital = 300 - 0 = 300
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  • Manny888
    Manny888 Registered Posts: 3
    Top level answer there Pian32!
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