Question

Using the following categories indicate the effects of the following transactions: Sales on account were $960, and related cost of goods sold was $530.

a) Increase in assets, increase in equity
b) Decrease in assets, decrease in equity
c) Increase in assets, decrease in equity
d) Decrease in assets, increase in equity

Answer 1

Sales on account increase assets due to a rise in accounts receivable and also increase equity due to the profit earned from sales exceeding the cost of goods sold.

Step-by-step explanation:

When looking at the effects of the following transactions: Sales on account were $960, and related cost of goods sold was $530, we need to determine the changes in the company's financial statements. Firstly, sales on account increase accounts receivable, an asset, by $960. Second, the cost of goods sold represents an expense, reducing net income and thereby equity by $530. However, the sales still result in a net increase in equity due to the profit margin.

Considering this, we have:

• An increase in assets because accounts receivable go up by $960.
• An increase in equity because the sales revenue (assuming no other expenses or losses) enhances owner's equity by the difference between sales and the cost of goods sold, which is $960 - $530 = $430.

Therefore, the correct answer is a) Increase in assets, increase in equity.