Multiple Choice
When you receive an invoice from a supplier for inventory purchased on account, what is the correct journal entry to record the impact of this transaction?
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2. Transaction Analysis
Journal Entries: Debits and Credits
Multiple Choice
Which of the following statements is incorrect regarding the use of debits and credits in journal entries for written contracts?
A
A written contract that results in the acquisition of an asset is recorded by debiting the appropriate asset account.
B
When a company signs a written contract but no cash or goods have been exchanged, no journal entry is required.
C
All written contracts must be recorded as journal entries at the time they are signed, regardless of whether any transaction has occurred.
D
A written contract that creates a liability is recorded by debiting a liability account.
Verified step by step guidance1
Step 1: Understand the concept of debits and credits in journal entries. Debits are used to increase asset and expense accounts, while credits are used to increase liability, equity, and revenue accounts. This foundational knowledge is essential for analyzing the statements provided.
Step 2: Analyze the first statement: 'A written contract that results in the acquisition of an asset is recorded by debiting the appropriate asset account.' This is correct because acquiring an asset increases the asset account, which is recorded as a debit.
Step 3: Analyze the second statement: 'When a company signs a written contract but no cash or goods have been exchanged, no journal entry is required.' This is correct because journal entries are only recorded when a transaction occurs, not merely when a contract is signed.
Step 4: Analyze the third statement: 'All written contracts must be recorded as journal entries at the time they are signed, regardless of whether any transaction has occurred.' This is incorrect because journal entries are only made when there is a financial transaction, not just the signing of a contract.
Step 5: Analyze the fourth statement: 'A written contract that creates a liability is recorded by debiting a liability account.' This is incorrect because liabilities are increased by credits, not debits. Debits would decrease a liability account.
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