Multiple Choice
When a company determines that a potential legal claim is probable and the amount can be reasonably estimated, how should it record this event in its journal entries?
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2. Transaction Analysis
Journal Entries: Debits and Credits
Multiple Choice
Theo needs to record new income earned by his business. Which of the following journal entries correctly reflects this transaction?
A
Debit Cash; Credit Revenue
B
Debit Revenue; Credit Cash
C
Debit Expenses; Credit Revenue
D
Debit Revenue; Credit Accounts Receivable
Verified step by step guidance1
Understand the nature of the transaction: Theo's business has earned new income, which means the business has generated revenue. Revenue increases equity and is recorded as a credit in the journal entry.
Determine the account receiving the cash or benefit: If the income is earned and cash is received immediately, the Cash account (an asset) increases. An increase in assets is recorded as a debit.
Match the accounts: The correct journal entry should reflect a debit to the Cash account (to show the increase in cash) and a credit to the Revenue account (to show the increase in income).
Eliminate incorrect options: Review the other options provided. For example, 'Debit Revenue; Credit Cash' is incorrect because revenue is not decreased in this transaction. Similarly, 'Debit Expenses; Credit Revenue' is incorrect because expenses are unrelated to this income transaction.
Confirm the correct journal entry: The correct journal entry is 'Debit Cash; Credit Revenue,' as it properly reflects the increase in cash and revenue due to the income earned.
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