Which of the following is the correct journal entry when a business contracts services from a third party and agrees to pay later?

• A. Debit Accounts Receivable; Credit Service Expense
• B. Debit Service Expense; Credit Accounts Payable
• C. Debit Cash; Credit Service Revenue
• D. Debit Service Revenue; Credit Cash

Answer: (B)

Verified step by step guidance

1. Understand the nature of the transaction: The business is contracting services from a third party and agrees to pay later. This means the business incurs an expense (Service Expense) and creates a liability (Accounts Payable) since payment will be made in the future.
2. Recall the accounting rule for expenses: Expenses are recorded as debits because they decrease equity. Therefore, the Service Expense account should be debited.
3. Recall the accounting rule for liabilities: Liabilities are recorded as credits because they represent obligations to pay in the future. Therefore, the Accounts Payable account should be credited.
4. Construct the journal entry: Based on the above rules, the correct journal entry is to debit the Service Expense account and credit the Accounts Payable account.
5. Verify the answer: Compare the constructed journal entry with the provided options. The correct option is 'Debit Service Expense; Credit Accounts Payable.'