In financial statements, Sales on account will cause an increase in ______. (Select all that apply.)Multiple select question.Accounts Payable on the balance sheetAccounts Receivable on the balance sheetAllowance for Doubtful Accounts on the income statementSales Revenue on the income statement
Question
In financial statements, Sales on account will cause an increase in ______. (Select all that apply.)Multiple select question.Accounts Payable on the balance sheetAccounts Receivable on the balance sheetAllowance for Doubtful Accounts on the income statementSales Revenue on the income statement
Solution
The correct answers are:
- Accounts Receivable on the balance sheet
- Sales Revenue on the income statement
Explanation:
When a company makes a sale on account (also known as credit sales), it does not receive cash immediately. Instead, the company records the amount as Accounts Receivable on the balance sheet. This is an asset account that represents the amount of money owed to the company by its customers who have purchased goods or services on credit.
Sales Revenue on the income statement will also increase. This is because the company has made a sale, and even though it has not yet received cash for that sale, it still recognizes the revenue. This is in accordance with the accrual basis of accounting, which states that revenues are recognized when earned, not necessarily when cash is received.
Accounts Payable on the balance sheet would not increase because this account represents the amount the company owes to its suppliers, not its customers.
Allowance for Doubtful Accounts on the income statement would not increase either. This account is a contra asset account (an asset account with a credit balance) that represents the amount of Accounts Receivable that the company does not expect to collect. It is not directly affected by sales on account.
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