Which of the following statements is correct regarding the definition of a liability?

• A. A liability is a future obligation that may or may not arise from past events.
• B. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.
• C. A liability is an owner's claim on the assets of the business.
• D. A liability is any asset that generates future economic benefits for the entity.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definition of a liability. A liability is defined as a present obligation of an entity that arises from past events, and its settlement is expected to result in an outflow of resources embodying economic benefits (e.g., cash, goods, or services).
2. Step 2: Analyze the first statement: 'A liability is a future obligation that may or may not arise from past events.' This is incorrect because liabilities are present obligations, not future ones, and they must arise from past events.
3. Step 3: Analyze the second statement: 'A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.' This is correct as it aligns with the formal definition of a liability.
4. Step 4: Analyze the third statement: 'A liability is an owner's claim on the assets of the business.' This is incorrect because an owner's claim on the assets is referred to as equity, not a liability.
5. Step 5: Analyze the fourth statement: 'A liability is any asset that generates future economic benefits for the entity.' This is incorrect because assets, not liabilities, generate future economic benefits. Liabilities represent obligations, not benefits.