Florida Building Contractor Business/Finance Practice Exam

Which account type is categorized as a liability?

1. Accounts Receivable

2. Unearned Revenues

3. Inventory

4. Equity

The correct answer is: Unearned Revenues

Unearned Revenues are classified as a liability because they represent amounts received by a business for services that have not yet been performed or goods that have not yet been delivered. When a company receives payment in advance, it incurs an obligation to provide the agreed-upon product or service in the future. This obligation is recorded on the balance sheet as a liability until the services are rendered or the goods are delivered, at which point it will be recognized as revenue. In contrast, Accounts Receivable refers to amounts owed to the business by customers for goods or services that have already been delivered, making it an asset. Inventory represents the goods that a company has in stock for the purpose of selling, which is also an asset. Equity reflects the residual interest in the assets of the business after deducting liabilities, and it is not considered a liability. Therefore, among the options provided, Unearned Revenues is the only one that fits the definition of a liability.