For a purchase on credit, which accounts are affected?

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Study for the AAT Level 2 Introduction to Bookkeeping Test. Use flashcards and multiple choice questions with hints and explanations. Prepare effectively for your exam!

Multiple Choice

For a purchase on credit, which accounts are affected?

Explanation:
When you buy on credit, you obtain goods now and commit to pay later, so two things happen in double-entry: you increase the purchases (an expense/inventory) and you create a liability to the supplier. In bookkeeping terms, that means you debit the Purchases account to reflect the increase in goods or services you’ve acquired, and you credit Trade Creditors to record the amount you owe. So the proper entry is Purchases with a debit of 500 and Trade Creditors with a credit of 500. The other possibilities would not show this combination. If you paid with cash, you’d use Bank instead of Trade Creditors; if you recorded Purchases as a credit, you’d be reducing the expense incorrectly; and debiting Trade Creditors would reduce the liability, which doesn’t match incurring the obligation.

When you buy on credit, you obtain goods now and commit to pay later, so two things happen in double-entry: you increase the purchases (an expense/inventory) and you create a liability to the supplier. In bookkeeping terms, that means you debit the Purchases account to reflect the increase in goods or services you’ve acquired, and you credit Trade Creditors to record the amount you owe. So the proper entry is Purchases with a debit of 500 and Trade Creditors with a credit of 500.

The other possibilities would not show this combination. If you paid with cash, you’d use Bank instead of Trade Creditors; if you recorded Purchases as a credit, you’d be reducing the expense incorrectly; and debiting Trade Creditors would reduce the liability, which doesn’t match incurring the obligation.

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