Which item is an example of a Liability?

• A. Accounts receivable.
• B. Common stock.
• C. Accrued expenses.
• D. Prepaid insurance.

Answer: (C)

Liabilities are obligations to sacrifice resources in the future, arising from a past event. Accrued expenses illustrate this idea: you have incurred a cost for services or goods already received but haven’t paid for yet. This creates a current obligation to pay, recorded as a liability because money will flow out to settle it. For example, if you’ve used utilities or earned wages by period end but haven’t been billed or paid, you recognize the expense and also record a corresponding accrued expenses liability.

By comparison, accounts receivable is an asset because it’s money others owe you; common stock is a type of equity representing ownership; and prepaid insurance is an asset since you’ve paid in advance for a service you will receive in the future.