Multiple Choice
Which of the following is classified as a plant asset?
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9. Current Liabilities
Types of Liabilities
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Which formula correctly calculates total liabilities?
A
Total Liabilities = Assets - Equity
B
Total Liabilities = Equity + Revenue
C
Total Liabilities = Current Liabilities + Long-term Liabilities
D
Total Liabilities = Revenue - Expenses
Verified step by step guidance1
Step 1: Begin by understanding the concept of liabilities. Liabilities represent obligations or debts that a company owes to external parties, such as loans, accounts payable, or other financial commitments.
Step 2: Recognize that total liabilities are typically divided into two categories: current liabilities (short-term obligations due within a year) and long-term liabilities (obligations due after a year).
Step 3: The formula for calculating total liabilities is: Total Liabilities = Current Liabilities + Long-term Liabilities. This formula combines both short-term and long-term obligations to determine the total amount owed by the company.
Step 4: Analyze the other formulas provided in the problem. For example, 'Total Liabilities = Assets - Equity' is derived from the accounting equation (Assets = Liabilities + Equity), but it is not the direct formula for total liabilities. Similarly, 'Total Liabilities = Equity + Revenue' and 'Total Liabilities = Revenue - Expenses' are incorrect because they do not align with the definition of liabilities.
Step 5: Conclude that the correct formula for calculating total liabilities is: Total Liabilities = Current Liabilities + Long-term Liabilities, as it accurately reflects the sum of all obligations owed by the company.
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