Question

Inco. recorded a customer's $20,000 check as a $20,000 debit to Cash and as a $2,000 credit to Accounts Receivable. This is an example of:

Answer 1

Inco. made an accounting error by recording a customer's $20,000 check incorrectly as a $2,000 credit to Accounts Receivable, which should be corrected by debiting Accounts Receivable for the $18,000 understated amount.

Step-by-step explanation:

Inco. recorded a customer’s $20,000 check as a $20,000 debit to Cash and as a $2,000 credit to Accounts Receivable. This situation is an example of an accounting error. Specifically, it looks like a transposition error where two digits have been reversed when recording the transaction. The correct entry should have been a $20,000 credit to Accounts Receivable to reflect the payment of the customer's debt.

The consequence of this error is an understatement of Accounts Receivable by $18,000 and no change in the cash balance, as the cash was correctly recorded.To reconcile this, Inco. would need to correct the entry by debiting Accounts Receivable for the $18,000 under-statement and crediting another account, possibly an error correction account or directly adjusting the initial incorrect entry, if their accounting system allows it.