Multiple Choice
Which of the following should be classified as current liabilities?
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9. Current Liabilities
Types of Liabilities
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How does a company classify a net negative balance in its bank account on the balance sheet?
A
As a non-current liability
B
As a current asset
C
As owner's equity
D
As a current liability, typically labeled as bank overdraft
Verified step by step guidance1
Understand the nature of a net negative balance in a bank account: A net negative balance occurs when a company withdraws more money than is available in its bank account, resulting in an overdraft.
Review the classification criteria for liabilities: Liabilities are obligations that a company owes to external parties, and they are classified as current or non-current based on their due date. Current liabilities are obligations expected to be settled within one year.
Determine why a bank overdraft is classified as a current liability: Since the overdraft represents an amount owed to the bank and is typically expected to be repaid within a short period (usually within the operating cycle or one year), it qualifies as a current liability.
Understand the labeling on the balance sheet: A bank overdraft is usually labeled explicitly as 'Bank Overdraft' under the current liabilities section of the balance sheet to provide clarity to users of financial statements.
Avoid misclassification: Ensure that the overdraft is not mistakenly classified as a non-current liability, current asset, or owner's equity, as these categories do not align with the nature of the obligation.
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