In this scenario, Clutch provided review services valued at $5,000 to its customers on account, meaning the payment will be received at a later date. This situation illustrates the concept of accounts receivable, which represents an asset for the company, as it indicates the amount owed by customers for services rendered. When services are provided on account, the company recognizes revenue even though cash has not yet been received.
The $5,000 charged to customers is classified as revenue, reflecting the income generated from the reviews. It's important to note that this revenue is recorded as a credit, as revenue accounts increase with credits. Conversely, the accounts receivable, which signifies the future cash inflow from customers, is recorded as a debit, since asset accounts increase with debits. This dual entry ensures that the accounting equation remains balanced.
To summarize the accounting entries: the company debits accounts receivable for $5,000, indicating an increase in assets, and credits revenue for $5,000, indicating an increase in equity. This transaction does not affect liabilities, as there are no obligations incurred from this revenue generation. As a result, the total assets increase to $63,000, while liabilities remain unchanged at $8,000, and equity increases by the same amount, reflecting the earned revenue.
Understanding this transaction is crucial, as it highlights the relationship between revenue, accounts receivable, and equity. Revenue increases equity, while expenses decrease it. This foundational knowledge is essential for preparing financial statements, such as the income statement, which summarizes revenues and expenses to determine net income and its impact on equity.