If financing charges are added to an accounts receivable balance, the entry will involve aSelect answer from the options belowcredit to interest revenue.debit to interest expense.credit to interest receivable.credit to accounts receivable.Save for LaterSubmit Answer
Question
If financing charges are added to an accounts receivable balance, the entry will involve aSelect answer from the options belowcredit to interest revenue.debit to interest expense.credit to interest receivable.credit to accounts receivable.Save for LaterSubmit Answer
Solution
The correct answer is "credit to interest receivable." Here's why:
When financing charges are added to an accounts receivable balance, it means that the company is earning interest on the money it is owed. This interest is an asset to the company, so it increases the company's assets.
In accounting, increases in assets are recorded as debits, and decreases are recorded as credits. However, in this case, the company is not receiving cash (which would be a debit to cash), but rather it is earning interest that it will receive in the future. This future interest is called "interest receivable."
Therefore, the company would record a credit to interest receivable, indicating an increase in this asset.
The other options are not correct because they do not accurately reflect the transaction. A credit to interest revenue or a debit to interest expense would be used if the company was receiving or paying interest, not earning it. A credit to accounts receivable would be used if the company was decreasing its accounts receivable, not increasing it with interest.
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