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Question:

On January 31, Dowling Inc. borrowed funds to purchase capital equipment for its business operations. On the same day, it also recorded the cost of salaries incurred to January 31, which will be paid on February 6. When these two transactions are recorded on January 31, the financial statement item that will increase the most is:

A liabilities.
Explaination

Borrowing funds to purchase capital equipment will result in an increase in assets (equipment) and in liabilities (debt). The accrual of the salaries that are owed, but not paid, as of month-end will increase expenses and increase liabilities (accrued salary expense). Therefore, these two transactions taken together will result in the greatest increase in liabilities.