what error occurs if a of an account receivable is incorrectly recorded by crediting accounts payable?
The correct answer and explanation is:
Correct Answer: A classification error occurs.
Explanation:
When an account receivable is incorrectly recorded by crediting accounts payable, the mistake represents a classification error in accounting. This type of error occurs when a transaction is recorded in the wrong account but with the correct amount. In this specific case, the transaction should have increased accounts receivable, an asset, but instead, it incorrectly increased accounts payable, a liability.
To understand this better, consider what the correct entry should be. If a business makes a sale on credit, it should debit accounts receivable to reflect the money owed by the customer and credit revenue to show income earned. However, if someone mistakenly credits accounts payable instead of revenue or fails to debit accounts receivable, it falsely shows that the business owes money to a supplier rather than being owed money by a customer.
This error affects the balance sheet in two major ways. First, it understates assets because accounts receivable are not recorded correctly. Second, it overstates liabilities due to the incorrect increase in accounts payable. This misrepresentation can distort the company’s financial health, making it appear less solvent or profitable than it actually is.
Furthermore, this error may also affect financial ratios such as the current ratio or debt-to-equity ratio. For example, understating current assets and overstating current liabilities will reduce the current ratio, which could mislead investors or creditors about the company’s ability to pay short-term obligations.
Detecting and correcting classification errors typically requires regular reconciliation of accounts and careful review of journal entries. An accountant would need to reverse the incorrect entry and record the correct one. Proper staff training and a solid internal control system are essential in minimizing such errors in the future.