When revenue is earned on credit, which entries are recorded?

When revenue is earned on credit, which entries are recorded?

• A. Debit: Revenue; Credit: Accounts Receivable
• B. Debit: Accounts Receivable; Credit: Revenue
• C. Debit: Cash; Credit: Revenue
• D. Debit: Revenue; Credit: Cash

Answer: (B)

When revenue is earned on credit, you recognize that you’ve earned income while also creating an asset representing the amount owed by the customer. The correct entry is a debit to Accounts Receivable (an asset that grows as money is owed to you) and a credit to Revenue (income that increases equity). Cash isn’t affected yet because the customer hasn’t paid. Why the other approaches don’t fit: debiting Revenue while crediting Accounts Receivable would incorrectly increase revenue while reducing the receivable, which doesn’t reflect the actual flow of economic benefits. Debiting Cash and crediting Revenue would imply cash was received at the time of earning, which isn’t the case with a credit sale. Debiting Revenue and crediting Cash similarly misstates both the income and the asset.

When revenue is earned on credit, you recognize that you’ve earned income while also creating an asset representing the amount owed by the customer. The correct entry is a debit to Accounts Receivable (an asset that grows as money is owed to you) and a credit to Revenue (income that increases equity). Cash isn’t affected yet because the customer hasn’t paid.

Why the other approaches don’t fit: debiting Revenue while crediting Accounts Receivable would incorrectly increase revenue while reducing the receivable, which doesn’t reflect the actual flow of economic benefits. Debiting Cash and crediting Revenue would imply cash was received at the time of earning, which isn’t the case with a credit sale. Debiting Revenue and crediting Cash similarly misstates both the income and the asset.