Which Accounts Are Affected, And In Which Direction, By The Following Business Transaction? For This Question, Ignore Inventory And Cost Of Goods Sold. Sale To A Customer On Credit, $4,500.

Which Accounts Are Affected, And In Which Direction, By The Following Business Transaction? For This Question, Ignore Inventory And Cost Of Goods Sold. Sale To A Customer On Credit, $4,500. 1) Accounts receivable increases 2) Cash increases 3) Accounts receivable decreases 4) Sales revenue increases 5) Accounts payable increases 6) Accounts payable decreases 7) Cash decreases 8) Sales revenue decreases
The correct options of this multiple choice question are 1) and 4) as when sales made to customer on credit worth $4,500, then this Business Transaction affects two types of accounts which are Accounts Receivable (AR) / Sundry Debtors (SD) and Sales Revenue. When sales is made, then the company earned the revenue whether the cash is received or not according to Accrual Basis of Accounting. As the payment is not received immediately from customer but a promise made from him to pay to the company within the specified time period, so the amount due from customer is created which is represented by accounts receivable which is a Current Asset and it is increasing, so we debit it. Sales revenue is also created as it is made so it is also increasing as a result, we credit it according to the Rules of Debit and Credit.

The journal entry to record is shown below:

                                              Accounts Receivable a/c $4,500

                                                                                       Sales Revenue a/c $4,500

                                                   (Sales Made To Customer On Credit / Account)

Accounts Receivable is recorded on assets side of balance under the heading of current assets while sales revenue is recorded on Income Statement as it is an Income Statement Account. As AR is a permanent account so its balance carried down to the next accounting period. As sales revenue is a temporary account, so it is closed to Income Summary Account at the end of the accounting period.

The effect of this transaction on Accounting Equation is that asset side or left side increases by $4,500 and liabilities & equity side or right side also increases by $4,500 but the accounting equation remains in balance as shown below:

                 Assets            =  Liabilities    +       Equity

                                                            +Accounts Receivable  =                            (+Sales Revenue )

                                                                         +$4,500            =                       +         $4,500

The other options 2), 3), 5), 6), 7) and 8) are incorrect choices here.

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