Multiple Choice
When a buyer purchases a cooperative and the sale is completed, which journal entry should the buyer record?
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2. Transaction Analysis
Journal Entries: Debits and Credits
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Which of the following best describes the effect on the accounting equation when a company records a journal entry that debits Cash and credits Service Revenue?
A
Assets increase; Equity increases
B
Assets decrease; Liabilities increase
C
Assets decrease; Equity decreases
D
Assets increase; Liabilities decrease
Verified step by step guidance1
Understand the accounting equation: Assets = Liabilities + Equity. This equation must always remain balanced.
Analyze the journal entry: Debiting Cash increases the Cash account, which is an asset. Therefore, Assets increase.
Next, consider the credit to Service Revenue. Service Revenue is part of Equity because it contributes to retained earnings. Crediting Service Revenue increases Equity.
Determine the overall effect: Since Cash (an Asset) increases and Service Revenue (part of Equity) increases, the accounting equation remains balanced.
Conclude that the correct description of the effect on the accounting equation is: 'Assets increase; Equity increases.'
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