You, the owner of XYZ Day Care, buy a new van for your business. The van costs $20,000, all of which you borrow from First American Bank. Which of the following correctly describes the journal entry for this transaction?
A.$20,000 debit to Vehicles, $20,000 credit to Accounts Payable
B.$20,000 debit to Vehicles, $20,000 credit to Notes Payable
C.$10,000 debit to Vehicles, $10,000 credit to Notes Payable
D.$20,000 debit to Vehicles, $20,000 credit to Owner's Equity
A.
To determine the correct journal entry for this transaction, we need to understand the basic principles of accounting and how different accounts are affected by different transactions. In this case, we are purchasing a van for $20,000 and borrowing the entire amount from First American Bank.
First, we need to identify the accounts involved in the transaction. The van is considered an asset and should be recorded in the Vehicles account. The borrowed money is considered a liability and should be recorded in the appropriate account (either Accounts Payable or Notes Payable).
Option A suggests that we debit Vehicles and credit Accounts Payable. However, Accounts Payable is typically used for short-term liabilities, such as invoices from suppliers that need to be paid within a short time frame. Notes Payable, on the other hand, is used for long-term liabilities, such as loans that are repaid over an extended period.
Option B suggests that we debit Vehicles and credit Notes Payable, which aligns with the fact that we borrowed the money from the bank. Moreover, it reflects that this is a long-term liability and not a short-term account like Accounts Payable.
Therefore, the correct journal entry for this transaction is:
$20,000 debit to Vehicles,
$20,000 credit to Notes Payable (Option B).