Multiple Choice
Which of the following is the correct journal entry when a business receives \$10,000 in cash from the owner as an investment?
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2. Transaction Analysis
Journal Entries: Business Formation Example
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?
A
Debit Accounts Receivable; Credit Service Expense
B
Debit Service Expense; Credit Accounts Payable
C
Debit Cash; Credit Service Revenue
D
Debit Service Revenue; Credit Cash
Verified step by step guidance1
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.'
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