Which account would typically appear on a construction company's balance sheet as a current liability?
Correct Answer
C) Accrued Payroll
Accrued Payroll represents wages earned but not yet paid, making it a current liability. Accounts Receivable is an asset, Equipment is a fixed asset, and Retained Earnings is equity.
Why This Is the Correct Answer
Accrued Payroll represents wages that employees have earned during a pay period but have not yet been paid by the company. This creates a debt obligation that the company must pay within a short timeframe, typically within the next pay cycle or within 30 days. Since current liabilities are debts that must be paid within one year (usually much sooner), accrued payroll perfectly fits this definition. Construction companies often have significant accrued payroll due to weekly or bi-weekly pay cycles and the timing differences between when work is performed and when paychecks are issued.
Why the Other Options Are Wrong
Option A: Retained Earnings
Equipment is a fixed asset (also called property, plant, and equipment) that appears on the asset side of the balance sheet. It represents long-term tangible assets used in business operations.
Option B: Equipment
Accounts Receivable represents money that customers owe to the construction company for completed work, making it a current asset, not a liability. This appears on the asset side of the balance sheet.
Option D: Accounts Receivable
Retained Earnings represents the accumulated profits that have been reinvested in the business rather than distributed to owners. This is an equity account, not a liability.
Memory Technique
Think 'OWED' for liabilities - Accrued Payroll is money OWED to employees. Use the acronym 'CARE' for balance sheet categories: Current assets, Accounts (current liabilities), Retained earnings (equity), Equipment (fixed assets).
Reference Hint
Business and Finance chapter covering balance sheet components and current vs. long-term liabilities
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