Debts owed to others by the business are called:

• A. Assets
• B. Revenue
• C. Liabilities
• D. Equity

Answer: (C)

The main idea here is what a business owes to others. Debts owed to outsiders are called liabilities. They are obligations that require the business to sacrifice future resources, usually cash, to settle. Liabilities arise when the company borrows money, buys on credit, or incurs other obligations. On the balance sheet, liabilities sit alongside equity as the right-hand side of the accounting equation: Assets = Liabilities + Equity. This distinguishes them from assets (what the business owns) and from equity (the owners’ claim after debts). Examples of liabilities include accounts payable, notes payable, and other accrued expenses.