accounting equation



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

Comments

  • Pian32
    Pian32 Registered Posts: 474 Dedicated contributor 🦉
    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
    AAT Level 4, MAAT
    ACCA in progress
    F4- Passed Aug 2020
    F5- Passed Dec 2020
    F6- Passed Sep 2020
    F7- Passed June 2021
    F8 - Passed Sep 2021
    F9 - Passed June 2021

    SBL -
    SBR - Passed Mar 22
    ATX - Passed Dec 21
    APM - Passed June 22
  • Manny888
    Manny888 Registered Posts: 3
    Top level answer there Pian32!
Privacy Policy