alleryStart learning →A supplier delivers goods and bills the buyer for payment later. How does the buyer record that credit?
AAs an account payable on its books
BAs an account receivable on its books
CAs retained earnings on its books
DAs a marketable security on its books
Answer & Solution
Correct answer: A. As an account payable on its books
1. Trade credit is the seller extending credit to the buyer between delivery of the goods and payment for them.
2. The buyer enters that credit on its books as an account payable.
3. The same transaction is an account receivable for the seller, so the two sides mirror one another.
4. In effect the credit is a short-term loan from the seller to the buyer, and it is a major source of short-term business financing.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.3 Obtaining Short-Term Financing_
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