D102 Financial Accounting - Set 2 - Part 3

Correct Answer: Sales revenue

When cash is collected from customers, accounts receivable is credited because the amount owed decreases.

Correct Answer: As an asset

Dividends are a distribution of earnings and are recorded as a reduction in retained earnings (a component of equity).

Correct Answer: Debit note payable, credit cash

The company reduces its liability (note payable) by debiting the account and credits cash because it has made a payment.

Correct Answer: Balance sheet

The income statement reports a companys revenues, expenses, and net income or loss over a period of time.

Correct Answer: Expense

Prepaid rent is considered an asset because it represents a future benefit (the right to use the rented property).

Correct Answer: Debit accounts receivable, credit sales revenue

Cash is debited because the company receives money, and sales revenue is credited because the sale has been made.

Correct Answer: Issuing common stock

Dividends reduce retained earnings as they are a distribution of profits to shareholders.

Correct Answer: An increase in revenue

A credit to retained earnings increases equity, usually from net income or adjustments that positively affect equity.

Correct Answer: When cash is received

The revenue recognition principle states that revenue is recognized when it is earned, not necessarily when cash is received.

Correct Answer: Unearned Revenue

Liability, revenue, and equity accounts carry normal credit balances, while asset, expense, and dividend accounts carry normal debit balances. Unearned Revenue is a liability representing an obligation to provide goods or services for which cash has already been received, so it has a normal credit balance. Accounts Receivable, Prepaid Rent, and Equipment are all assets and therefore carry normal debit balances.