What transaction is occurring if a company debits Cash and credits Notes Receivable?

• A. The company is collecting cash from a customer to settle a note receivable.
• B. The company is borrowing cash by signing a note payable.
• C. The company is issuing a new note receivable to a customer.
• D. The company is paying off a note payable with cash.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the accounts involved in the transaction. 'Cash' is an asset account, and a debit to Cash indicates an increase in the company's cash balance. 'Notes Receivable' is also an asset account, and a credit to Notes Receivable indicates a decrease in the company's receivable balance.
2. Step 2: Analyze the nature of Notes Receivable. Notes Receivable represents amounts owed to the company by customers or other parties, typically documented in a formal agreement. A credit to Notes Receivable suggests that the company is reducing the balance of this account.
3. Step 3: Consider the relationship between Cash and Notes Receivable. If the company is debiting Cash and crediting Notes Receivable, it implies that the company is receiving cash in exchange for reducing the amount owed to it under Notes Receivable.
4. Step 4: Interpret the transaction. The company is collecting cash from a customer to settle a note receivable. This means the customer is paying off their debt, and the company is recording the receipt of cash while removing the corresponding receivable from its books.
5. Step 5: Confirm the correct answer. Based on the analysis, the correct transaction is: 'The company is collecting cash from a customer to settle a note receivable.'