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: Business Formation Example

Financial Accounting

2. Transaction Analysis

Journal Entries: Business Formation Example

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Multiple Choice

Which of the following is the correct journal entry when a business contracts services from a third party and agrees to pay later?

Debit Accounts Receivable; Credit Service Expense

Debit Service Expense; Credit Accounts Payable

Debit Cash; Credit Service Revenue

Debit Service Revenue; Credit Cash

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Verified step by step guidance

Understand the nature of the transaction: The business is contracting services from a third party and agrees to pay later. This means the business incurs an expense (Service Expense) and creates a liability (Accounts Payable) since payment will be made in the future.

Recall the accounting rule for expenses: Expenses are recorded as debits because they decrease equity. Therefore, the Service Expense account should be debited.

Recall the accounting rule for liabilities: Liabilities are recorded as credits because they represent obligations to pay in the future. Therefore, the Accounts Payable account should be credited.

Construct the journal entry: Based on the above rules, the correct journal entry is to debit the Service Expense account and credit the Accounts Payable account.

Verify the answer: Compare the constructed journal entry with the provided options. The correct option is 'Debit Service Expense; Credit Accounts Payable.'