Multiple Choice
Which of the following statements about using a debit card linked to your checking account for regular spending is correct?
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1. Introduction to Accounting
Types of Accounting
Multiple Choice
A formal credit arrangement between a creditor and debtor is called a(n):
A
Account receivable
B
Accrued expense
C
Note payable
D
Prepaid expense
Verified step by step guidance1
Understand the concept of a formal credit arrangement: A formal credit arrangement is a documented agreement between a creditor (lender) and a debtor (borrower) that specifies the terms of repayment, including the amount borrowed, interest rate, and repayment schedule.
Review the definitions of the given options: Account receivable refers to money owed to a company by its customers for goods or services provided on credit. Accrued expense refers to expenses that have been incurred but not yet paid. Prepaid expense refers to payments made in advance for goods or services to be received in the future. Note payable refers to a formal written promise to pay a specific amount of money at a future date, often including interest.
Identify the key characteristics of a note payable: A note payable is a formal credit arrangement that is documented in writing, often involving a promissory note. It is a liability for the debtor and an asset for the creditor.
Compare the options to the definition of a formal credit arrangement: Among the options provided, only 'Note payable' matches the description of a formal credit arrangement between a creditor and debtor.
Conclude that the correct answer is 'Note payable' based on the definitions and comparison of the options provided.
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