When a business purchases services on account such as insurance, rent, or other utilities it needs to record these as expenses.
Purchase Services on Account Journal Entry Example
For example, suppose a business purchases insurance for 950, and is given credit terms from the supplier.
The accounting records will show the following services on account journal entry:
The business has purchased services (insurance cover) and this is recorded as an expense in the income statement.
The credit entry represents the liability to pay the supplier in the future for the insurance cover.
Purchase Services on Account Accounting Equation
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the total equity of the business. This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
|None||=||Accounts payable||+||Insurance expense|
In this case the balance sheet liabilities (accounts payable) have been increased by 950, and the income statement has a insurance expense of 950. The expense reduces the net income, retained earnings, and therefore owners equity in the business.
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