[TG01]

The effect on the statement of financial position when the business pays a creditor is: which of the following?


Decrease asset bank; decrease liability creditor.

Decrease asset bank; decrease equity.

Decrease asset creditor; decrease liability bank.

None of the above.

[pready]

You need to think about the transaction a business pays a creditor. What does this transaction mean. When you pay for something you use cash. For an example you pay your credit card you send in a check and your bank account is reduced, which means you have less cash in your account than what you started with. So cash decreases and cash is an asset. Also when you pay a creditor you are reducing the amount that you owe that creditor. For an example your credit card balance is $1,000 and you pay $600 you will reduce what you owe to $400 (not factoring in the interest). So you are reducing what you owe a creditor. When you owe a creditor means it is a liability because you have to pay the creditor. An equity is an ownership account. A creditor is a business that you owe money to, not an asset. An asset is something a business owns or has title to like cash, accounts receivable, equipment, or patents.