Chapter 2, Problem 1MCQ

Amalia Company received its utility bill for the current period of $700 and immediately paid it. Its journal entry to record this transaction includes a

1. Credit to Utility Expense for $700.
2. Debit to Utility Expense for $700.
3. Debit to Accounts Payable for $700.
4. Debit to Cash for $700.
5. Credit to capital for $700.

To determine

Journal Entry: It refers to the process of recording the data into books of accounts on continuous basis. It is a process of record keeping for every transaction by a company or a firm.

Rules of Journal Entry: The rules for journal entry are defined by five accounting components,

• Assets: Increase in asset should be debit and decrease should be credit.
• Liabilities: Increase in liabilities should be credit and decrease should be debit.
• Equity: Increase in Equity should be credit and decrease should be debit.
• Expense: Increase in expense should be debit and decrease should be credit.
• Revenue: Increase in revenue should be credit and decrease should be debit.

To Identify: Correct statement from given statements.

Answer:

Option b, debit to utility expense for $700 is the correct option.

Explanation of Solution

Option b.

Since, increase in expense reduces equity of a company, it should be debited.

Option a.

Since, increase in expense reduces equity of a company, it should be debited.

Option c.

Since, accounts payable is a short term liability and increase overall liability when it increases, it should be credited.

Option d.

Since, cash is an asset and decrease overall asset when it reduces, it should be credited.

Option e.

Since, there is no effect on the common stock in the given transaction, it should remain same.

Conclusion

Thus, the correct option is b.