Question

Transactions that affect earnings do not necessarily affect cash. Identify the effect, if any, that each of the following transactions would have upon cash and net income.
(a) Purchased $100 of supplies for cash.
(b) Recorded an adjusting entry to record use of $20 of the above supplies.
(c) Made sales of $1,200, all on account.
(d) Received $800 from customers in payment of their accounts.
(e) Purchased equipment for cash, $2,500.

Answer 1

Answer:

(a) Cash reduction, no effect on net income

(b) Net income reduction, no effect on cash

(c) Net income increment, no effect on cash

(d) Cash increase, no effect on net income

(e) Cash reduction, no effect on net income

Explanation:

When items or services are exchanged for cash, these may be recognized as assets or expenses. While expenses reduce income, assets do not as it forms the exchange of one asset (cash) for another.

Considering the transactions in light of the above,

a) Purchased $100 of supplies for cash - Supplies are inventory (an asset) and would not reduce net income until it is used up

(b) Recorded an adjusting entry to record use of $20 of the above supplies. No effect on cash, entry is a reduction in supplies and recognition of cost of goods sold. As such net income reduces.

(c) Made sales of $1,200, all on account. -  Sales on account are credit sales. This will be recognized as a credit to sales (increase in net income) and a debit to accounts receivable.

(d) Received $800 from customers in payment of their accounts. - To recognize this, we debit cash (increase in cash) and debit accounts receivable. This has no effect on net income.

(e) Purchased equipment for cash, $2,500 - Again, this is he exchange of cash for an asset. This has no effect on income.