On July 1, a company receives an invoice for \$800 with terms 1/10, net 30. What is the correct journal entry to record the receipt of the invoice?

• A. Debit Purchases (or Inventory) \$800; Credit Accounts Payable \$800
• B. Debit Cash \$800; Credit Accounts Payable \$800
• C. Debit Accounts Payable \$800; Credit Cash \$800
• D. Debit Accounts Receivable \$800; Credit Sales \$800

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the invoice terms. The terms 1/10, net 30 mean that the company can take a 1% discount if payment is made within 10 days; otherwise, the full amount is due within 30 days.
2. Step 2: Determine the initial journal entry for receiving the invoice. When the company receives the invoice, it records the liability by debiting Purchases (or Inventory) for \$800 and crediting Accounts Payable for \$800. This reflects the obligation to pay the supplier.
3. Step 3: Consider the payment timing. If the company pays within 10 days, it can take the 1% discount. Calculate the discount amount using the formula: \( \text{Discount} = \text{Invoice Amount} \times \text{Discount Rate} \), where \( \text{Discount Rate} = 0.01 \).
4. Step 4: Record the payment journal entry. If the company pays within the discount period, it will debit Accounts Payable for \$800, credit Cash for the discounted amount (\( \text{Invoice Amount} - \text{Discount} \)), and credit Purchase Discounts for the discount amount. If payment is made after 10 days, the company will debit Accounts Payable for \$800 and credit Cash for \$800.
5. Step 5: Exclude irrelevant options. The options involving Accounts Receivable and Sales are not applicable here, as this transaction pertains to a purchase, not a sale. Focus on the entries related to Purchases, Accounts Payable, and Cash.