Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

2. Transaction Analysis

Journal Entries: Debits and Credits

Financial Accounting

2. Transaction Analysis

Journal Entries: Debits and Credits

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Multiple Choice

On July 1, a company receives an invoice for $800 with terms 1/10, net 30. What is the correct journal entry to record the receipt of the invoice?

Debit Purchases (or Inventory) $800; Credit Accounts Payable $800

Debit Cash $800; Credit Accounts Payable $800

Debit Accounts Payable $800; Credit Cash $800

Debit Accounts Receivable $800; Credit Sales $800

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Verified step by step guidance

Step 1: Understand the invoice terms. The terms 1/10, net 30 mean that the company can take a 1% discount if payment is made within 10 days; otherwise, the full amount is due within 30 days.

Step 2: Determine the initial journal entry for receiving the invoice. When the company receives the invoice, it records the liability by debiting Purchases (or Inventory) for $800 and crediting Accounts Payable for $800. This reflects the obligation to pay the supplier.

Step 3: Consider the payment timing. If the company pays within 10 days, it can take the 1% discount. Calculate the discount amount using the formula: $ \text{Discount} = \text{Invoice Amount} \times \text{Discount Rate} $, where $ \text{Discount Rate} = 0.01 $.

Step 4: Record the payment journal entry. If the company pays within the discount period, it will debit Accounts Payable for $800, credit Cash for the discounted amount ($ \text{Invoice Amount} - \text{Discount} $), and credit Purchase Discounts for the discount amount. If payment is made after 10 days, the company will debit Accounts Payable for $800 and credit Cash for $800.

Step 5: Exclude irrelevant options. The options involving Accounts Receivable and Sales are not applicable here, as this transaction pertains to a purchase, not a sale. Focus on the entries related to Purchases, Accounts Payable, and Cash.