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
D.
The correct journal entry for this transaction would be option B: $20,000 debit to Vehicles, $20,000 credit to Notes Payable.
Actually, the correct answer is B. The journal entry for this transaction would be a $20,000 debit to Vehicles and a $20,000 credit to Notes Payable.
To understand why, let me explain the concept of journal entries. A journal entry is a record of a business transaction in the accounting records of a company. It includes the amount, accounts affected, and the direction of the transaction (debit or credit).
In this case, you, as the owner of XYZ Day Care, borrowed $20,000 from First American Bank to purchase a new van. The van represents a long-term asset for your business, which is why it would be debited for $20,000. On the other hand, the money you borrowed is a liability to your business, which gets credited for the same amount.
Notes Payable is an account that represents the amount of money owed by a company for a loan or other credit transaction. Therefore, the correct journal entry for this transaction would be a $20,000 debit to Vehicles and a $20,000 credit to Notes Payable.