Multiple Choice
Which of the following taxes has a ceiling on the amount of annual earnings subject to tax?
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9. Current Liabilities
Types of Liabilities
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following transactions causes a decrease in total liabilities?
A
Borrowing money from a bank
B
Purchasing inventory on credit
C
Accruing interest expense
D
Payment of an accounts payable with cash
Verified step by step guidance1
Understand the concept of liabilities: Liabilities represent obligations or debts owed by a company to external parties, such as loans, accounts payable, or accrued expenses.
Analyze the transaction 'Payment of an accounts payable with cash': Accounts payable is a liability that represents amounts owed to suppliers for goods or services purchased on credit. Paying off accounts payable reduces the liability because the obligation is settled.
Recognize the impact of cash payment: When cash is used to pay off accounts payable, the company's cash (an asset) decreases, and the accounts payable (a liability) decreases. This transaction does not affect equity directly.
Compare this transaction to the others listed: Borrowing money from a bank increases liabilities (loan payable), purchasing inventory on credit increases liabilities (accounts payable), and accruing interest expense increases liabilities (interest payable). Only the payment of accounts payable decreases liabilities.
Conclude that the payment of accounts payable with cash is the correct transaction that causes a decrease in total liabilities, as it settles an existing obligation.
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