When the entity invoices a customer, we expect to see a credit to Revenue and debit to Trade Receivables. In the journal entry postings between Revenue, Trade Receivables, and Cash analysis, which account should be selected as "Secondary?"
Options:
- Trade Receivables
- Revenue
- Cash
Answer (2)
When an entity invoices a customer, it records a financial transaction to recognize the revenue. This involves making specific accounting journal entries.
In this scenario, when a company invoices a customer, the following entries are made:
Debit to Trade Receivables : This entry reflects the amount that the customers owe to the company. It indicates that the company expects to receive cash from the customer in the future.
Credit to Revenue : This entry records the income generated from selling goods or services. It increases the revenue, reflecting that the company has earned money.
The question asks which account should be selected as 'Secondary' among Revenue, Trade Receivables, and Cash.
Revenue is where the income is recognized, and it's typically the primary focus when analyzing income statements.
Trade Receivables are recorded when an invoice is issued, showing what the customer owes.
Cash would be affected when payment is made, not when the invoice is issued.
In this context, when the invoice is issued, Trade Receivables would be considered a 'Secondary' account as it supports understanding the main focus of the transaction (Revenue) through its correlation to future cash collections. This is the chosen account that provides insight into the company's asset status in relation to the revenue recognized.
Therefore, the correct option for 'Secondary' in the context of the journal entry when invoicing is 'Trade Receivables'.
Invoicing a customer involves a debit to Trade Receivables and a credit to Revenue. The 'Secondary' account in this scenario is Trade Receivables, as it supports the primary focus of recognized Revenue. This highlights future cash collections and the company's asset status related to the revenue earned.
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