Player Company sold inventory costing $900 for $1,400 on account. If Player Company operates under the accrual basis, what effect will the transaction have on the liabilities and owners' equity side of the balance sheet?
A) There will be no effect since the sales and/or cost of goods sold are income statement accounts.
B) Owners' equity will decrease by $900.
C) Owners' equity will increase by $500.
D) There will be no effect since the customer to whom the inventory was sold has not yet paid.

Question

Quizplus · Accepted Answer

Under the accrual basis, revenue is recognized when earned, and expenses are recognized when incurred. The sale increases revenue by $1,400 and cost of goods sold by $900, resulting in a net increase in owners' equity by $500 ($1,400 - $900).

Player Company Sold Inventory Costing $900 for $1,400 on Account