Utah General Contractors - Business and Law Practice Exam

What are unpaid wages considered in accounting?

1. Assets

2. Expenses

3. Current Liabilities

4. Long-term Liabilities

The correct answer is: Current Liabilities

Unpaid wages are classified as current liabilities in accounting, reflecting amounts owed to employees for work performed but not yet paid. This classification indicates that these obligations are expected to be settled within one year or during the normal operating cycle of the business. By categorizing unpaid wages as current liabilities, businesses recognize their responsibility to fulfill these payments in the near future. This helps in providing a clear picture of the company’s financial obligations at any given time and aids stakeholders in assessing the company's short-term financial health. Other classifications such as assets or expenses do not align with how unpaid wages function within the accounting framework. Assets represent resources owned by a company that can provide future economic benefits, while expenses reflect costs incurred in generating revenue during a specific period. Long-term liabilities, on the other hand, pertain to debts that are not due within the upcoming year, which does not apply to unpaid wages. Thus, understanding unpaid wages as current liabilities is essential for accurate financial reporting and management.