Question

Determine the financial statement effects of Accounts Payable Transactions, when Hobson Company has the following items:

a. Purchases $1,250 of inventory on credit.

b. Sells inventory for $1,650 on credit.

c. Records $1,260 cost of sales for transaction b.

d. Receives $1,650 cash towards accounts receivable.

e. Pays $1,260 cash to settle accounts payable.

What is the ending balance of Accounts Payable after the above transactions?

Answer 1

(a) Purchasing $1250 inventory on credit will increase the accounts payable in the liabilities section of the balance sheet. It will also increase the inventory in assets side.

(b) Selling inventory for $1650 on credit will increase the accounts receivable in the assets side and simultaneously it will decrease the inventory in assets, as inventory is going out.

(c) Recording cost of $1260 as cost of sales is an expense. It will decrease the income.

(d) Receiving $1650 towards accounts receivable will decrease the accounts receivable balance in the assets side of the balance sheet. Simultaneously it will also increase cash in the assets side.

(e) Payment of cash of $1260 to settle accounts payable will reduce accounts payable in the liabilities section. It will also reduce the cash in the assets side of the balance sheet.

Only transactions given in (a) and (e) are affecting the accounts payable. In transaction (a) accounts payable is increased by $1250 and in transaction (e) accounts payable are paid for $1260, so it will reduce their balance by $1260.

Net balance of accounts payable = $1250 - $1260 = - $10

Since net balance is negative, so it means that there is a debit balance in the accounts payable.Or accounts payable are overpaid by $10.