In practice, the date of each transaction could also be included here. For illustration purposes, this extra information is not necessary. Question: Assume $9,000 is borrowed from a local bank when officials sign a new note payable that will have to be repaid in several years. What journal entry is prepared by a company’s accountant to reflect the inflow of cash received from a loan? Answer: As always, recording begins with an analysis of the transaction. Here, cash increases as the result of the incurred debt (notes payable). Cash—an asset—increases $9,000, which is shown as a debit. The company’s notes payable balance also goes up by the same amount. As a liability, the increase is recorded through a credit. By using debits and credits in this way, the financial effects are entered into the accounting records.
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In the above transaction, the Lawndale Company made a sale but the cash will not be collected until some later date. Why is revenue reported at the time of sale rather than when the cash is eventually collected? Accounting is conservative. Thus, delaying recognition of sales revenue (and the resulting increase in net income) until the $5,000 is physically received might have been expected. Answer: This question reflects a common misconception about the information conveyed through financial statements. As shown above in Journal 4A, recognition of revenue is not tied directly to the receipt of cash. One of the most important elements comprising the structure of U.S. is accrual accounting, which serves as the basis for timing the reporting of revenues and expenses. Because of the direct impact on net income, such recognition issues are among the most complicated and controversial in accounting.
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