Which of the following describes a vendor credit?

Question

BlackTom AI · Accepted Answer

Question restatement: Which of the following describes a vendor credit?

Option 1: 'Increases the amount that you owe to a vendor and must be paid immediately' — This describes a liability that worsens your outstanding balance and implies an immediate payment, which is the opposite of what a vendor credit does. A vendor credit is not an obligation to pay more; it is a reduction.

Option 2: 'Reduces the amount that you owe to a vendor and can be applied to future bills' — This accurately characterizes a vendor credit. It lowers your current debt with the vendor and provides flexibility to use the credit on future invoices, effectively acting like a prepaid discount or offset for later purchases.

Option 3: 'Increases the amount that you owe to a vendor and must be paid immediately' — Similar to Option 1, this describes an increased liability with an immediate payment requirement, which is the opposite of a credit. A credit would not increase what you owe; it would decrease it.

Option 4: 'Reduces the amount that is owed to you by a customer and can be applied to future purchases' — This describes a reduction of money owed to you (a decrease in revenue due to a customer credit or refund), not a vendor credit. It concerns money you are owed, not money you owe to a vendor, and it doesn’t pertain to applying credits to vendors’ invoices.

Explanation of the key concept: In accounting and purchasing, a vendor credit is a credit memo issued by a supplier that reduces the amount you owe to them. It can be used toward future purchases or offset against existing balances, depending on how the supplier routes credits. The core idea is a benefit to your payable balance, not an increase in liability or a correction of money you are owed by customers.

Why incorrect options fail: Option 1 and Option 3 describe increasing amounts owed or immediate payment requirements, which contradicts the nature of a credit. Option 4 describes an adjustment related to money owed by customers to you, not a reduction in what you owe to a vendor or applying credit toward future vendor invoices. The distinctive feature of a vendor credit is reducing your payable balance with a supplier and offering future applicability, which is captured in Option 2.

QBO25E1 - QuickBooks Online Module 5 Quiz

Which of the following describes a vendor credit?

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