Which statement best defines a liability?

Which statement best defines a liability?

• A. An asset
• B. An obligation arising from past events; example wages payable or taxes payable.
• C. A revenue item recognized when earned
• D. A shareholder's claim on assets after dissolution

Answer: (B)

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources. This definition fits why wages payable or taxes payable are liabilities: they are obligations that arose from past activities and will require payment in the future. An asset, on the other hand, is something the entity controls that will bring future economic benefits. Revenue is income earned from operations, not an obligation. An equity claim is a shareholder’s residual interest in assets after liabilities are settled, not a liability.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources. This definition fits why wages payable or taxes payable are liabilities: they are obligations that arose from past activities and will require payment in the future. An asset, on the other hand, is something the entity controls that will bring future economic benefits. Revenue is income earned from operations, not an obligation. An equity claim is a shareholder’s residual interest in assets after liabilities are settled, not a liability.