What is a liability?

What is a liability?

• A. Amounts of money that a business owes other people / business
• B. Assets owned by the business
• C. Shareholder equity
• D. Revenue earned but not yet collected

Answer: (A)

A liability is an obligation to settle something in the future, such as money owed to creditors, arising from past business activities. It represents a claim against the business’s resources by outsiders. On financial statements, liabilities sit alongside assets and owners’ equity, tied together by the basic equation: Assets = Liabilities + Equity. Common examples include loans, accounts payable, and accrued expenses. The other descriptions refer to assets (things the business owns), equity (owners’ claims on assets), or revenue that’s earned but not yet collected (an asset like accounts receivable). Describing amounts owed to others best captures what a liability is.

A liability is an obligation to settle something in the future, such as money owed to creditors, arising from past business activities. It represents a claim against the business’s resources by outsiders. On financial statements, liabilities sit alongside assets and owners’ equity, tied together by the basic equation: Assets = Liabilities + Equity. Common examples include loans, accounts payable, and accrued expenses. The other descriptions refer to assets (things the business owns), equity (owners’ claims on assets), or revenue that’s earned but not yet collected (an asset like accounts receivable). Describing amounts owed to others best captures what a liability is.