CPB / BookKeeping Accounts Receivable and Accounts Payable 1 — Questions and Answers
Question 1: What does accounts receivable represent on a company's balance sheet?
- Money owed by the company to its suppliers
- Money owed to the company by its customers (Correct answer)
- Cash held in the company's bank account
- Prepaid expenses not yet recognized
Correct answer: Money owed to the company by its customers
Accounts receivable is a current asset representing amounts customers owe the company for goods or services delivered on credit.
Question 2: When a customer pays an outstanding invoice in full, which journal entry is correct?
- Debit Cash, Credit Accounts Receivable (Correct answer)
- Debit Accounts Receivable, Credit Cash
- Debit Accounts Payable, Credit Cash
- Debit Revenue, Credit Accounts Receivable
Correct answer: Debit Cash, Credit Accounts Receivable
When cash is received, Cash (asset) increases with a debit and Accounts Receivable (asset) decreases with a credit.
Question 3: What is the normal balance of Accounts Payable?
- Debit
- Credit (Correct answer)
- Either debit or credit depending on terms
- Zero, as it nets against accounts receivable
Correct answer: Credit
Accounts Payable is a liability account and carries a normal credit balance, increasing when purchases are made on credit.
Question 4: An accounts receivable aging report categorizes outstanding balances by:
- Customer credit rating
- Invoice amount in ascending order
- How long invoices have been outstanding (Correct answer)
- Product or service type sold
Correct answer: How long invoices have been outstanding
An aging report groups receivables into time buckets (e.g., 0–30, 31–60, 61–90 days) to identify overdue accounts and estimate bad debt.
Question 5: When a company purchases inventory on credit terms, the correct journal entry is:
- Debit Accounts Payable, Credit Inventory
- Debit Cash, Credit Inventory
- Debit Inventory, Credit Accounts Payable (Correct answer)
- Debit Inventory, Credit Accounts Receivable
Correct answer: Debit Inventory, Credit Accounts Payable
Purchasing inventory on credit increases the Inventory asset (debit) and creates an obligation recorded as Accounts Payable (credit).
Question 6: A credit memo issued to a customer in accounts receivable typically results in:
- An increase in the customer's account balance
- A reduction in the amount the customer owes (Correct answer)
- A cash payment made to the customer immediately
- An increase in the company's revenue
Correct answer: A reduction in the amount the customer owes
A credit memo reduces the customer's outstanding balance, often issued for returns, allowances, or billing corrections.
Question 7: Which of the following best distinguishes accounts payable from notes payable?
- Accounts payable always carries interest; notes payable does not
- Accounts payable arises from credit purchases; notes payable is a formal written promise to pay (Correct answer)
- Notes payable is always short-term; accounts payable can be long-term
- Accounts payable is an asset; notes payable is a liability
Correct answer: Accounts payable arises from credit purchases; notes payable is a formal written promise to pay
Accounts payable results from routine credit purchases with informal terms, while notes payable is a formal promissory note that may include interest and specific repayment terms.
CPB / BookKeeping Accounts Receivable and Accounts Payable 1
What does accounts receivable represent on a company's balance sheet?