One of the business's suppliers provides inventory to them on credit and they purchased $2000 worth and will pay it in 6 weeks. Select the flows and accounts that the business would use to record this transaction.
Question
One of the business's suppliers provides inventory to them on credit and they purchased $2000 worth and will pay it in 6 weeks. Select the flows and accounts that the business would use to record this transaction.
Solution
This transaction would involve the following flows and accounts:
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Accounts Payable: This is a liability account that tracks money owed by a business to its suppliers. When the business purchases inventory on credit, the amount of $2000 would be recorded as an increase in the Accounts Payable account.
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Inventory: This is an asset account that tracks the cost of goods that a business has in stock and plans to sell. The $2000 worth of inventory purchased would be recorded as an increase in the Inventory account.
The transaction would be recorded in the general ledger as follows:
- Debit (increase) Inventory $2000
- Credit (increase) Accounts Payable $2000
This records the fact that the business now has an additional 2000 to its supplier. The payment that will be made in 6 weeks will be recorded as a decrease in Accounts Payable and a decrease in Cash or Bank account.
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