Kleen Windows Receipt Recording
How should Kleen Windows record the receipt of $770 (including GST) from customer John Jones?
Which of the following entries correctly records this receipt?
- DR Debtors $770; CR Bank $770.
- DR Bank $770; CR Debtors $770.
- DR Bank $770; CR Services revenue $700; CR GST payable $70.
- DR Debtors $770; CR Services revenue $700; CR GST payable $70.
The Correct Entry to Record the Receipt from John Jones
The correct entry to record the receipt from John Jones for services previously supplied on credit by Kleen Windows would be:
DR Bank $770
CR Debtors $770
This entry reflects the increase in the company's cash balance (Bank) and the decrease in the amount owed by the customer (Debtors). The amount of $770 represents the total payment received, including the Goods and Services Tax (GST).
The debit to Bank indicates an increase in the asset account as the cash is received and deposited into the company's bank account. The credit to Debtors reduces the amount owed by John Jones, as he has now made the payment for the services provided.
It is important to note that in this entry, we are only recording the receipt of cash and the reduction in the outstanding amount owed by the customer. There is no need to separately account for the services revenue or the GST payable in this entry.
The services revenue would have been recognized when the services were initially provided, and the GST payable would have been recorded separately at that time as well. Therefore, the correct entry in this case focuses solely on the cash receipt and the adjustment to the customer's outstanding balance.
By recording the receipt accurately, Kleen Windows ensures that its financial records reflect the actual cash inflow and the corresponding reduction in its accounts receivable from John Jones. This helps maintain accurate and up-to-date financial information for the company's management and external stakeholders.