When a company pays an amount it owes a creditor:
A)assets are decreased and net income is decreased.
B)assets are decreased and liabilities are increased.
C)liabilities are decreased and net income is increased.
D)assets are decreased and liabilities are decreased.

Question

Quizplus · Accepted Answer

When a company pays an amount it owes a creditor, the company's assets are decreased because cash or other assets (such as inventory, etc.) are used to settle the debt. At the same time, the company's liabilities are decreased because the obligation to pay the creditor has been fulfilled. There is no effect on net income because this transaction does not involve any revenues or expenses. Therefore, only choice D is correct.

When a Company Pays an Amount It Owes a Creditor