During which event does Rosemary's liability increase?

During which event does Rosemary's liability increase?

• A. When she buys office supplies
• B. When she deposits her own money
• C. When she pays cash for an expense
• D. When she buys furniture with cash

Answer: (A)

The correct answer is that Rosemary's liability increases when she buys office supplies on credit. When a business purchases office supplies without immediately paying for them, it typically incurs a liability because it has an obligation to pay the supplier in the future. This situation creates an accounts payable, representing a financial obligation that the company has to settle.

In contrast, depositing her own money does not increase her liabilities; instead, it increases her owner's equity as she invests more into the business. Paying cash for an expense also does not create a liability, as it represents an immediate exchange where cash is given in return for the product or service consumed. Similarly, buying furniture with cash does not introduce any new liabilities, as the transaction is settled immediately with a cash payment, maintaining a balance sheet that reflects reduced cash assets without incurring future obligations.