When money is borrowed from the bank, an asset (cash) is increased and a liability (notes payable) is also increased by an equal amount. Net income is increased only when revenue has been earned”and money borrowed from the bank represents a liability that must be repaid, not revenue that has been earned. Paying off accounts payable decreases an asset (cash) and decreases a liability (accounts payable) by an equal amount. Collecting an account receivable increases an asset (cash) and decreases another asset (accounts receivable) by equal amounts. In both cases, only balance sheet accounts are involved. Net income is increased by revenues and decreased by expenses.
The expense associated with a cash payment of an account payable would have been recorded in an earlier transaction (when the expense was incurred and the account payable was established); by the same logic, the revenue associated with the collection of an account receivable would have been recorded in an earlier transaction (when the revenue was earned and the account receivable was established).Amounts shown in the balance sheet below reflect the following use of the data given: An asset should have a probable future economic benefit; therefore the accounts receivable are stated at the amount expected to be collected from customers.
Assets are reported at original cost, not current worth. Depreciation in accounting reflects the spreading of the cost of an asset over its estimated useful life. Assets are reported at original cost, not at an assessed or appraised value. The amount of the note payable is calculated using the accounting equation, A = L + OE. Total assets can be determined based on items (a), (b), and (c); total owners equity is known after considering item (e); and the note payable is the difference between total liabilities and the accounts payable. The retained earnings account balance represents the difference between cumulative net income and cumulative dividends.
The problem could be solved without calculating this number.