In financial accounting, the Accounts Payable account is best classified as which type of liability?

• A. A contingent liability that is recorded only if the amount can be reasonably estimated and is probable
• B. A long-term liability representing amounts owed that are due beyond one year
• C. An equity account representing the owners’ residual interest in the company
• D. A current liability arising from purchases on credit that is usually due within one year or the operating cycle, whichever is longer

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the nature of Accounts Payable. It represents amounts a company owes to suppliers or vendors for goods or services received on credit.
2. Step 2: Recall the classification of liabilities in financial accounting: current liabilities and long-term liabilities. Current liabilities are obligations expected to be settled within one year or the operating cycle, whichever is longer.
3. Step 3: Recognize that Accounts Payable is typically settled in the short term, usually within one year, making it a current liability rather than a long-term liability.
4. Step 4: Differentiate Accounts Payable from contingent liabilities, which are potential obligations dependent on future events and recorded only if probable and estimable.
5. Step 5: Confirm that Accounts Payable is not an equity account, as equity represents owners’ residual interest, not amounts owed to creditors.