Multiple Choice
If a company owes $100 to a supplier for goods purchased on credit, this amount is classified as which type of liability?
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9. Current Liabilities
Types of Liabilities
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Which of the following is a type of liability?
A
Inventory
B
Prepaid Expenses
C
Accounts Payable
D
Retained Earnings
Verified step by step guidance1
Step 1: Understand the concept of liabilities. Liabilities are obligations that a company owes to external parties, typically arising from past transactions or events. They are recorded on the balance sheet and represent amounts that must be settled in the future, often through payment of cash, goods, or services.
Step 2: Review the options provided in the question. The options include Inventory, Prepaid Expenses, Accounts Payable, and Retained Earnings. Each of these represents a different category in financial accounting.
Step 3: Analyze each option: Inventory is an asset, as it represents goods available for sale. Prepaid Expenses are also assets, as they represent payments made in advance for future benefits. Retained Earnings are part of equity, representing accumulated profits not distributed as dividends.
Step 4: Focus on Accounts Payable. Accounts Payable is a liability because it represents amounts owed by the company to suppliers for goods or services received but not yet paid for. It is a current liability, typically settled within a short period.
Step 5: Conclude that the correct answer is Accounts Payable, as it fits the definition of a liability, unlike the other options provided.
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Types of Liabilities practice set
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