Accounting Fundamentals Certification (AFC) Practice Test

When services are sold on account, it means the company has provided a service but has not yet received cash. To record this transaction, the company needs to reflect the increase in sales revenue and the increase in accounts receivable.

Sales revenue is part of the income statement and is recognized when earned, hence it should be recorded with a credit. In accounting, revenues increase with a credit entry; therefore, when the services valued at $300 are rendered, sales are increased by crediting the sales account.

On the other hand, since the customer has not yet paid cash, accounts receivable, which represents the amount owed to the business by the customer, is increased. Accounts receivable is an asset, and assets increase with a debit; thus, when the service is sold on account, we record the increase in accounts receivable by debiting this account.

This ensures that the accounting equation—Assets = Liabilities + Equity—remains balanced. By debiting accounts receivable and crediting sales, the transaction reflects the economic reality of the sale on credit and accurately records the increase in the company's resources.