The collection of an account receivable is recorded by a debit to Cash and a credit to Accounts Payable.If this error is not corrected:
A)Total liabilities are understated.
B)Total assets are understated.
C)Total liabilities are overstated.
D)Owners' equity is overstated.

Question

Quizplus · Accepted Answer

DThe error involves crediting Accounts Payable instead of Accounts Receivable. This mistake does not affect the total assets since the debit to Cash correctly increases assets. However, it incorrectly increases liabilities by crediting Accounts Payable, leading to an overstatement of liabilities (C). Since liabilities are part of the accounting equation (Assets = Liabilities + Owners' Equity), overstating liabilities without an actual increase in assets or a decrease in owners' equity means that owners' equity is also overstated as a balancing figure (D).

The Collection of an Account Receivable Is Recorded by a Debit