Financial Accounting: An Integrated Statements Approach, 2nd Edition

g. Provided services of $6,100 to patients on account.

h. Received $5,500 for services provided to patients who paid cash.

i. Received $4,200 from insurance companies, which paid on patients’ accounts for

services that have been provided.

j. Paid $100 on account for supplies that had been purchased.

k. Expenses paid during November were as follows: wages, $2,790; rent, $800; utili-

ties, $580; interest, $100; and miscellaneous, $420.

l. Paid dividends of $1,200 to stockholders (Dr. Landry).

In analyzing and recording the November transactions for Family Health Care, we

use the integrated financial statement framework that we used in Chapter 2. In so

doing, we record increases and decreases for each financial statement element. These

separate elements are referred to as accounts.

Transaction a. On November 1, received $1,800 from ILS Company as rent for the use of

Family Health Care’s land as a temporary parking lot from November 2007 through March

2008.In this transaction, Family Health Care entered into a rental agreement for the

use of its land. The agreement required the payment of the rental fee of $1,800 in ad-

vance. The rental agreement also gives ILS Company the option of renewing the agree-

ment for another four months.

How does this transaction affect the accounts (elements) of the balance sheet, and

how should it be recorded? Since cash has been received, cash is increased by $1,800,

but what other account should be increased or decreased? Family Health Care has

agreed to rent the land to ILS Company for five months and thus has incurred a lia-

bility to provide this service—rental of the land. If Family Health Care canceled the

agreement on November 1, after accepting the $1,800, it would have to repay that

amount to ILS Company. Thus, Family Health Care should record this transaction as

an increase in cash and an increase in a liability for $1,800. Because the liability relates

to rent that has been paid in cash, but not yet earned, it is recorded as unearned

revenue, as shown below.

100 Chapter 3 Accrual Accounting Concepts

Statement of Cash Flows

a. Operating 1, 800

Statement of

Cash Flows

Income

Statement

Income Statement

Balances, Nov. 1

a. Received rent in advance

Balances

As time passes, the liability will decrease, and Family Health Care will earn rental

revenue. For example, at the end of November, one-fifth of the $1,800 ($360) will have

been earned. Later in this chapter, we will discuss how to record the $360 of earned

rent revenue at the end of November.

You should note that the November 1 balances shown in the preceding integrated

financial statement spreadsheet are the ending balances from October. That is, the cash

balance of $7,320 is the ending cash balance as of October 31, 2007. Likewise, the other

Balance Sheet

Assets  Liabilities  Stockholders’ Equity

Notes Unearned Capital Retained

Cash  Land  Payable  Revenue  Stock  Earnings

7,320 12,000 10,000 6,000 3,320

1, 800 1, 800

9,120 12,000 10,000 1, 800 6,000 3,320