Question

7.Question 7

A company sells its products to a customer for $5,000 on account. The cost of the products sold is $2,000. Select the journal entries that are correct (assuming no other transactions).

(1) Accounts Receivable (A) (inc) 5,000

...Retained Earnings (OE) (revenue) (inc) 5,000

(2) Retained Earnings (OE) (COGS) (dec) 2,000

...Inventory (A) (dec) 2,000

(3) Accounts Receivable (A) (inc) 5,000

...Inventory (A) (dec) 2,000

...Retained Earnings (OE) (Net Earnings) (inc) 3,000

(4) Retained Earnings (OE) (COGS) (dec) 5,000

...Inventory (A) (dec) 5,000

(5) Accounts Receivable (A) (inc) 2,000

...Retained Earnings (OE) (revenues) (inc) 2,000

(1) and (4)

(1) and (2)

(2) and (5)

(3)

Please explain

Answer 1

As the sales made on account therefore accounts receivable is increases with the sale amount and revenue has to be recognized with the same amount. As the sales made therefore cost of goods sold increase that means retained earnings decreases and inventory has also been decrease with the amount of cost of goods sold because inventory has been sold. Therefore entry would be as below:

Accounts receivable (Inc)	5,000
Retained earnings (revenue) (inc)		5,000
(to record sales entry)
Retained earnings (COGS) (dec)	2,000
Inventory (dec)		2,000
(to record cost of sold)

Answer: (1) and (2)