Which Of The Following Statements Is (Are) Correct Regarding The Definition Of A Liability? (Check All That Apply.)

The correct options of this multiple choice question (mcq) are A, B and E as Liabilities are debts due or payable owed by the business to outsiders such as creditor, banks, financial institutions, etc., against the assets of the business. These are increased on the right side of their T-Account as these have normal credit balances while these are decreased on debit side of their t-accounts as these have unusual or negative balance on debit side of their t-accounts.

The business can settle its liabilities either paying assets such as paying cash to write off liabilities or by providing products or services to others i.e., a business purchased office equipment from its creditor and then instead of paying cash payment to him provided products or services equal to the worth of office equipment.

For example, rent of $5,000 is payable by the business to rental company during the current accounting period. As the payment has not yet been made, so the adjusting journal entry to record is to debit rent expense account and credit rent payable account with the amount of $5,000. When the cash payment is made to settle the rent payable account, then we debit rent payable account and credit cash account with the amount of $5,000. Here, firstly, rent payable account increases so we credit it and record it on the credit side of its t-account. Then the payment is made to write off rent payable account, so we debit it and record it on the debit side of its t-account as shown below:

                                                                  Rent Payable Account

                                           $                                                              $

                                                                  Rent Expense a/c          5,000

 

Cash a/c                           5,000                                           

                                       _______                                                  _______

 

Total                                 5,000                                                        5,000

                                       _______                                                 ________

                                       _______                                                 ________

The other options C and D are incorrect choices here as the statements in these options are related with the definition of an asset and not with the definition of a liability in accounting.