If Lou opened a line of credit at the tractor supply store and used it to purchase $600 in inventory, how would you categorize the $600 borrowed from the store?

If Lou opened a line of credit at the tractor supply store and used it to purchase $600 in inventory, how would you categorize the $600 borrowed from the store?

• A. Asset
• B. Liability
• C. Equity
• D. Revenue

Answer: (B)

Borrowing money to buy inventory creates a liability because you now owe that money to someone else. In this case, Lou uses a line of credit to obtain $600 in inventory. The act of borrowing adds an obligation to repay, so the $600 appears on the balance sheet as a liability. At the same time, the inventory increases by $600 as an asset, reflecting the goods Lou now owns. So the borrowed amount is categorized as a liability, not as equity or revenue, and the asset affected by the transaction is the inventory. When the inventory is later sold, revenue is recognized, but the initial borrowing remains a liability until it’s paid down.

Borrowing money to buy inventory creates a liability because you now owe that money to someone else. In this case, Lou uses a line of credit to obtain $600 in inventory. The act of borrowing adds an obligation to repay, so the $600 appears on the balance sheet as a liability. At the same time, the inventory increases by $600 as an asset, reflecting the goods Lou now owns. So the borrowed amount is categorized as a liability, not as equity or revenue, and the asset affected by the transaction is the inventory. When the inventory is later sold, revenue is recognized, but the initial borrowing remains a liability until it’s paid down.