Multiple Choice
Which of the following costs are reported on both a company's income statement and balance sheet?
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1. Introduction to Accounting
The Financial Statements
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Which of the following best describes the effect of recording sales on account on the balance sheet?
A
Decrease in assets and increase in liabilities
B
Increase in liabilities and decrease in assets
C
No effect on assets or equity
D
Increase in assets and increase in equity
Verified step by step guidance1
Understand the concept of 'sales on account': This refers to a situation where a company sells goods or services but does not receive immediate payment. Instead, the amount owed by the customer is recorded as an asset called 'Accounts Receivable.'
Analyze the impact on assets: When sales on account are recorded, the 'Accounts Receivable' asset increases because the company expects to receive payment in the future.
Analyze the impact on equity: Sales generate revenue, which increases the company's net income. Net income contributes to retained earnings, a component of equity, so equity increases as a result.
Confirm there is no impact on liabilities: Recording sales on account does not involve borrowing or creating obligations, so liabilities remain unchanged.
Summarize the effect: The recording of sales on account results in an increase in assets (Accounts Receivable) and an increase in equity (via retained earnings).
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