Future Business Leaders of America (FBLA) Accounting Practice Test

What does "Sale on Account" signify?

1. A cash sale at the time of transaction

2. A sale for which cash is received immediately

3. A sale for which cash will be received at a later date

4. A transaction with a discount

The correct answer is: A sale for which cash will be received at a later date

"Sale on Account" signifies a transaction in which goods or services are sold to a customer, but payment is not made immediately. Instead, the customer agrees to pay for the items at a future date, creating an account receivable for the seller. This means the seller has provided the product or service with the expectation of receiving cash later, which is recorded in the accounting books. This type of arrangement is common in businesses that extend credit to customers, allowing them to purchase items without paying upfront. Understanding this concept is crucial in accounting because it affects the cash flow and financial statements of a business. In particular, sales on account increase accounts receivable, which impacts the balance sheet, and they also play a role in revenue recognition, indicating that the seller has earned income even though it has not yet collected cash.