Final answer:
When an expense has been incurred but not yet paid, a liability is recorded, creating or increasing a liability account and recording the expense, in accordance with accrual accounting.
Step-by-step explanation:
If an expense has been incurred but will be paid later, then the correct answer is: B) a liability account is created or increased and an expense is recorded. This represents an accounting principle known as accrual accounting, where transactions are recorded when they occur, not necessarily when cash changes hands. In this case, the company has benefited from a service or received goods and therefore recognizes the expense when it is incurred, which simultaneously increases a liability signifying an obligation to pay in the future.
In alignment with the concept shown in a T-account, this accounting entry will ensure that the firm's financial statements accurately reflect its true financial position at any given time. Since liabilities and equity appear on the right side of the T-account, and the incurred expense (which will later become a cash outflow) represents a liability, it increases this side, maintaining the fundamental accounting equation where Assets = Liabilities + Equity (or Net Worth).