Transaction 8—A sale of merchandise was made previously in Transaction 4 for $5,000. No cash was received at that time but is collected now. What accounts are affected by the receipt of money from an earlier sale? Answer: The revenue from this transaction was properly recorded previously in Transaction 4 when the sale originally took place and the account receivable balance was established. Revenue should not be recorded again or it will be double-counted causing reported net income to be overstated. Instead, the accountant indicates that this increase in cash is caused by the decrease in the accounts receivable balance. cash (asset) increases by $5,000 accounts receivable (asset) decreases by $5,000 Question: Transaction 9—Inventory was bought in Transaction 1 for $2,000 and later sold in Transaction 4. Now, however, the company is ready to make payment on the amount owed for this merchandise. When cash is delivered to settle a previous purchase of inventory, what is the financial effect of the transaction?
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As a result of the payment, cash is decreased by $2,000. The inventory was recorded previously when acquired. Therefore, this new transaction does not replicate that effect. Instead, the liability established in number 1 is removed from the books. The company is not buying the inventory again but simply paying the debt established for these goods.
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