Question

Montgomery Equipment Rental Company received​ $1,000 cash from a​ customer; the amount was owed to the business from the previous month. What is the effect of this transaction on the accounting​ equation?A. Cash increases and Accounts Payable decreases B. Cash increases and Service Revenue increases C. Accounts Receivable increases and Service Revenue increases D. Cash increases and Accounts Receivable decreases

Answer 1

Answer:

Cash increases and Accounts Receivable decreases(D)

Explanation:

$1000 represents earned rental income that has been recognized as revenue in the previous month but yet to be paid by customer. Hence, this would have been debited to account receivable ledger.

Upon cash receipt in the current month, this will be debited to Cash Account(Increase) and credited to Account Receivables (to reduce receivable balance).

The effect of this transaction will only affect Statement of Financial Position under current assets by reducing receivables balance and increase cash balance.