Question

What does it mean if a firm records a sales transaction as follows? Debit - Accounts Receivable $5,000 Credit - Sales $5,000 Debit - Cost of Goods Sold $5,000 Credit - Merchandise Inventory $5,000 The firm has done improper accounting because there should only ever be one debit and one credit.. The firm is probably a non-profit because it is only breaking even on this transaction. The firm has probably simply recorded a typical entry to record the sale and remove the item from inventory Either the accountant did the entry wrong or the company is run by idiots because if a company only breaks even on merchandise sales, it will lose money when it tries to pay workers, the light bill, etc.

Answer 1

Solution:

If sales and cost of goods sold are equal it means company is selling its goods at cost and will not be able to recover its operating cost.

Therefore recording of such transaction means, "Either the accountant did the entry wrong or the company is run by idiots because if a company only breaks even on merchandise sales, it will lose money when it tries to pay workers , the light bill, etc"

Hence last option is correct,