Debt financing is represented on “Liabilities” section whereas equity financing is represented on the “Equity” section of a balance sheet. As you have learned, equity is the “owners’ claims in business”. Liabilities are “creditors’ claims on total assets” and as “existing debts and obligations of company.” Companies must settle or pay these claims, debts, and obligations at some time in the future by transferring assets or services.

Liabilities have three main characteristics:

• They occur because of a past transaction or event.

• They create a present obligation for future payment of cash or services.

• They are an unavoidable obligation.

The correct answer is B.