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.
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.
Popular Double Entry Bookkeeping Examples
This purchase services on account journal entry is one of many examples used in double entry bookkeeping, discover another at the links below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.