Nicklaus Company sold inventory costing $1,000 for $1,400 on account.If Nicklaus Company operates under the accrual basis, what effect will the transaction have on the liabilities and owners' equity side of the balance sheet?

Question

Quizplus · Accepted Answer

The transaction will increase both sales revenue and cost of goods sold (COGS) by $1,400 and $1,000 respectively. This will result in a gross profit of $400 ($1,400 - $1,000). Since Nicklaus Company operates under the accrual basis, the revenue and COGS will be recognized at the time of sale, even though the customer has not yet paid. This will ultimately increase the company's net income and, therefore, increase the owners' equity by the amount of the gross profit, which is $400.

Nicklaus Company Sold Inventory Costing $1,000 for $1,400 on Account