When a business receives an unpaid electricity account, it should: Group of answer choices debit Electricity Expense and credit Accounts Receivable. debit Electricity Expense and credit Accounts Payable. debit Accounts Payable and credit Electricity Expense. make no entry until the bill is paid.
Question
When a business receives an unpaid electricity account, it should: Group of answer choices
debit Electricity Expense and credit Accounts Receivable.
debit Electricity Expense and credit Accounts Payable.
debit Accounts Payable and credit Electricity Expense.
make no entry until the bill is paid.
Solution
When a business receives an unpaid electricity account, it should debit Electricity Expense and credit Accounts Payable.
Here's why:
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When a business receives a bill for electricity, it has incurred an expense. Even though it hasn't paid the bill yet, the expense is recorded because the company has used the electricity. This follows the accrual basis of accounting, which records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged.
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Therefore, the company should debit (increase) the Electricity Expense account to record the cost of the electricity used.
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At the same time, the company now has a liability because it owes money to the electricity company. This is recorded as an increase in Accounts Payable, which is a liability account. Increases in liability accounts are recorded as credits.
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Therefore, the correct entry when receiving an unpaid electricity bill is to debit Electricity Expense and credit Accounts Payable. The bill will be paid later, at which point the company will debit (decrease) Accounts Payable and credit (decrease) Cash.
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