Edison Consulting received a $550 utilities bill and immediately paid it. Edison’s general Journal entry to record this transaction will include a:
Debit to Utilities Expense for $550.
Credit to Accounts Payable for $550.
Debit to Cash for $550
Credit to Utilities Expense for $550
Debit to Accounts Payable for $550
The correct answer and explanation is :
When Edison Consulting received a $550 utilities bill and immediately paid it, the appropriate general journal entry would be:
- Debit Utilities Expense for $550.
- Credit Cash for $550.
This entry reflects the increase in expenses and the corresponding decrease in cash due to the payment.
Explanation:
In accrual accounting, expenses are recognized when they are incurred, not necessarily when cash is paid. Upon receiving the utilities bill, Edison Consulting has consumed services worth $550, creating an obligation to pay. By debiting the Utilities Expense account, the company acknowledges this expense, which will appear on the income statement, reducing net income. Simultaneously, crediting the Cash account decreases the company’s cash balance on the balance sheet, reflecting the payment made.
This method ensures that both the expense and the cash outflow are accurately recorded in the period in which the utility services were consumed and paid for.