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A company received a bill for newspaper advertising services, $400. The bill will be paid in 10 days. How would the transaction be recorded today?

a. Debit Advertising Expense $400, credit Accounts Payable $
b. Debit Accounts Payable $400, credit Advertising Expense $400.
c. Debit Accounts Payable $400, credit Cash $400.
d. Debit Advertising Expense $400, credit Cash $400.

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Answer:

Option A is correct ( Debit Advertising Expense $400, credit Accounts Payable $400)

Explanation:

Option A is correct ( Debit Advertising Expense $400, credit Accounts Payable $400)

Account                                                   Debit                             Credit

Advertising Expense                              $400                                              

          Account Payable                                                                $400              

Advertising expense of $400 is considered in transaction as debit because it is the service company is receiving and in order to balance the statement company has to pay $400 as account payable which is the liability and is credited.                          

Answer:

a). Debit Advertising Expense $400, Credit Accounts Payable $400

Explanation:

The first thing to note is that although the bill is received for the newspaper today, the bill will be paid in 10 days.

Accounting however,does not allow that we postpone recording the receipt of the bill until we make payment. This is because of the Accrual basis of recognizing transactions. This means that expenses are recognized as soon as they occur and not when cash is paid for them.

As such since expense is recognized but there is no cashflow until 10 days, the liability created today must be recorded as follows

1. The Advertising Expense Account recognizing the creation or expense

2. The Accounts Payable showing there is a liability that has been created by the fact that we are not paying the cash for the expense immediately.

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