. On June 1st, Green Pea, Inc. purchased $1,200 worth of supplies on account. How does this transaction affect Green Pea's accounts?
a. Increase supplies and accounts payable by $1,200
b. Increase supplies and decrease cash by $1,200
c. Increase supplies and decrease accounts payable by $1,200
d. No effect since cash has not been paid
The correct answer is option a. Increase supplies and accounts payable by $1,200.
When Green Pea, Inc. purchases supplies on account, it means they are buying supplies and agreeing to pay for them in the future. This transaction increases the supplies account because the company now has additional supplies on hand. It also increases the accounts payable account because the company owes money to the supplier for the supplies purchased.
To determine how this transaction affects Green Pea, Inc.'s accounts, we need to understand the basic principles of accounting. In this transaction, Green Pea, Inc. purchased $1,200 worth of supplies on account.
When a company purchases supplies on account, it means that they acquired the supplies but did not make an immediate payment for them. Instead, they have an accounts payable balance, which represents an amount owed to the supplier.
Now, let's go through the options:
a. Increase supplies and accounts payable by $1,200: This option is correct. When Green Pea, Inc. purchases supplies on account, they increase their supplies account by $1,200 to reflect the addition of supplies to their assets. At the same time, they have an obligation to pay the supplier, so their accounts payable also increases by $1,200.
b. Increase supplies and decrease cash by $1,200: This option is incorrect. The transaction does not involve a cash payment, so there is no decrease in cash.
c. Increase supplies and decrease accounts payable by $1,200: This option is incorrect. The accounts payable balance would increase, not decrease when supplies are purchased on account.
d. No effect since cash has not been paid: This option is incorrect. The transaction may not involve a cash payment, but it does affect the accounts as explained in option a.
Therefore, the correct answer is a. Increase supplies and accounts payable by $1,200.