State BPA Fundamental Accounting Practice Exam

What happens when a credit is posted to a vendor's liability account?

1. Decreases the amount you owe the vendor

2. No effect on your balance

3. Increases the amount you owe the vendor

4. Increases your cash balance

The correct answer is: Increases the amount you owe the vendor

When a credit is posted to a vendor's liability account, it decreases the total amount you owe the vendor. A liability account reflects what a business owes to others, and when a credit is made to this account, it reduces the balance. This action is often due to payments made or returns processed, effectively lessening the obligation to the vendor. In this context, when you credit a liability account, you're reducing the amount owed, hence affecting the balance owed to the vendor. This contrasts with the other options where a credit would either have no effect on the balance, increase the balance owed, or increase cash, which does not align with the nature of a credit transaction in a liability context. Thus, the understanding of liability accounts, including how debits and credits affect them, is crucial in accurately managing such financial transactions.