A liability created by buying goods or services on credit is typically recorded to which of the following accounts?

• A. Accounts Payable (credit)
• B. Inventory (credit)
• C. Cash (debit)
• D. Accounts Receivable (debit)

Answer: (A)

Verified step by step guidance

1. Understand the nature of the transaction: When goods or services are purchased on credit, the company incurs a liability to pay the supplier in the future. This liability is typically recorded in the Accounts Payable account.
2. Identify the accounts involved: In this scenario, the purchase of goods or services affects two accounts: (1) Accounts Payable (a liability account) and (2) the account representing the goods or services received, such as Inventory (an asset account).
3. Determine the accounting entry: For purchases on credit, the liability (Accounts Payable) is credited, as credit entries increase liabilities. The asset account (e.g., Inventory) is debited, as debit entries increase assets.
4. Exclude irrelevant accounts: Cash is not involved in this transaction because no immediate payment is made. Accounts Receivable is also irrelevant because it pertains to amounts owed to the company, not amounts the company owes.
5. Summarize the journal entry: The correct journal entry for this transaction is to debit Inventory (or the appropriate asset account) and credit Accounts Payable to reflect the liability created by the credit purchase.