Multiple Choice
Which type of receivable is created when a check that a bank refuses to pay is returned to the company?
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7. Receivables and Investments
Types of Receivables
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Which type of receivable transaction involves the receipt of money that decreases the accounts receivable balance?
A
Sales on account
B
Collection of accounts receivable
C
Recognition of bad debt expense
D
Issuance of a promissory note
Verified step by step guidance1
Understand the concept of accounts receivable: Accounts receivable represents money owed to a company by its customers for goods or services provided on credit. It is recorded as an asset on the balance sheet.
Identify the impact of different transactions on accounts receivable: Sales on account increase accounts receivable, while collection of accounts receivable decreases it. Recognition of bad debt expense adjusts for uncollectible accounts, and issuance of a promissory note may convert accounts receivable into a note receivable.
Focus on the transaction that decreases accounts receivable: When a company collects money from its customers for outstanding invoices, the accounts receivable balance decreases because the owed amount is paid.
Relate the collection of accounts receivable to the accounting equation: The receipt of cash increases the cash account (an asset) and decreases accounts receivable (another asset), keeping the total assets unchanged.
Conclude that the correct transaction is the collection of accounts receivable, as it directly reduces the accounts receivable balance by recording the payment received from customers.
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