A Liability is defined as which of the following?

A Liability is defined as which of the following?

• A. An amount owed by a business to someone else. Eg: bank loans, money owed to suppliers, unpaid tax
• B. An asset
• C. Income
• D. An expense

Answer: (A)

A liability is an obligation the business must settle in the future, usually by transferring cash or other resources, and it arises from past events. The description “an amount owed by a business to someone else, e.g., bank loans, money owed to suppliers, unpaid tax” fits this idea exactly. These amounts are what the business owes to others and will require future outflows of resources, which is what a liability represents and how it’s shown on the balance sheet. Assets, by contrast, are resources the business controls that will bring future benefits. Income is money earned from operating activities and increases equity, while expenses are costs recognized in the period that reduce profit and equity. None of these describe an obligation to pay someone in the future, so they aren’t liabilities.

A liability is an obligation the business must settle in the future, usually by transferring cash or other resources, and it arises from past events. The description “an amount owed by a business to someone else, e.g., bank loans, money owed to suppliers, unpaid tax” fits this idea exactly. These amounts are what the business owes to others and will require future outflows of resources, which is what a liability represents and how it’s shown on the balance sheet.

Assets, by contrast, are resources the business controls that will bring future benefits. Income is money earned from operating activities and increases equity, while expenses are costs recognized in the period that reduce profit and equity. None of these describe an obligation to pay someone in the future, so they aren’t liabilities.