What is the effect on the statement of financial position when the business pays a creditor?
A)Decrease asset creditor; decrease liability bank
B)Decrease asset bank; decrease liability creditor
C)Decrease asset bank; decrease equity
D)None of the above

Question

Quizplus · Accepted Answer

When a business pays a creditor, it means that it uses its bank balance to settle the liability owed to the creditor. Therefore, both the asset side (bank) and the liability side (creditor) decrease by an equal amount. Option A is incorrect because it suggests a decrease in the asset creditor, but in reality, the creditor is a liability, not an asset. Option C is incorrect because paying a creditor does not affect equity. Option D is incorrect because the transaction has an impact on the statement of financial position.

What Is the Effect on the Statement of Financial Position