The process of collecting accounts receivable will
Show answer Hide answer
Answer: A. Increase assets and decrease assets
Explanation
Collecting an account receivable converts a credit customer balance into physical cash. This transaction reduces accounts receivable while simultaneously increasing cash by the exact same amount. Because both accounts are assets, total assets remain unchanged. Accounts receivable and cash are both classified as current assets on the balance sheet. When a debtor pays, asset composition shifts from a receivable to liquid cash. The net total of assets experiences no overall increase or decrease.
This collection process improves business liquidity without generating new revenue or income. It represents the realization of previously recorded sales transactions in actual funds. Monitoring this conversion rate helps managers evaluate credit policy effectiveness. Collecting receivables does not affect liabilities or capital directly, ruling out liability changes. Total asset value remains constant rather than increasing, because one asset replaces another.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
Related questions
Q1. At what stage of the accounting cycle are closing entries typically recorded:
Show answer Hide answer
Answer: B. At the time of closing the accounts
Closing entries are processed specifically at the end of an accounting period. Their main purpose is to zero out temporary revenue and expense accounts. These balances are transferred to permanent equity or retained earn...
Q2. When closing stock is present in the Trial Balance, it indicates that______________?
Show answer Hide answer
Answer: B. It is adjusted in the Purchase A/c
When closing stock appears in the trial balance it has already been credited to the purchases account, which is why it is not adjusted again through the trading account. A trial balance lists only the balances that have...
Q3. In which part of the financial statements do contingent liabilities of a company appear__________?
Show answer Hide answer
Answer: C. Notes on account to Balance Sheet
Contingent liabilities depend on the occurrence or non-occurrence of uncertain future events. Because their exact outcome cannot be determined currently, they are not recorded on the face of the financial statements. Ins...
Q4. At what value is closing stock typically recorded______________?
Show answer Hide answer
Answer: D. Cost price or Market price whichever is lower
Closing stock is valued at cost price or market price, whichever is lower, to adhere to conservatism. This principle prevents businesses from overstating their assets and current period profits. Unforeseen market drops a...
Q5. Applying the conservatism concept results in______________?
Show answer Hide answer
Answer: B. Understatement of Assets
Applying the conservatism concept requires accountants to anticipate potential losses while ignoring unrealized gains. This cautious approach leads to lower reported asset values and deferred profit recognition. Conseque...
Q6. What term describes the compensation a borrower pays to a lender, representing the cost of borrowing from the borrower's perspective?
Show answer Hide answer
Answer: A. Interest Rate
The interest rate represents the compensation paid by a borrower to a lender for using funds. From the borrower's perspective, this exact same percentage measures the explicit cost of borrowing. Thus, it correctly define...