When a company records sales on credit, how does it impact the accounts and financial statements?Question 12Answera.Increases revenue and decreases accounts receivable.b.Increases cash and decreases accounts receivable.c.Increases cash and increases revenue.d.Increases accounts receivable and increases revenue.
Question
When a company records sales on credit, how does it impact the accounts and financial statements?Question 12Answera.Increases revenue and decreases accounts receivable.b.Increases cash and decreases accounts receivable.c.Increases cash and increases revenue.d.Increases accounts receivable and increases revenue.
Solution
The correct answer is d. Increases accounts receivable and increases revenue.
Here's why:
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When a company makes a sale on credit, it does not receive cash immediately. Instead, the customer promises to pay in the future. This promise to pay is recorded as an increase in "Accounts Receivable" on the company's balance sheet.
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At the same time, the company also records the sale as revenue on its income statement. This is because under the accrual basis of accounting, revenues are recognized when earned, not when cash is received.
So, the impact of recording sales on credit is to increase both Accounts Receivable (an asset on the balance sheet) and Revenue (on the income statement).
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