What is Liabilities

*Liabilities

1.According to IASB Framework liability is defined as follows:

A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits (IASB Framework)

3. Liabilities are obligations of the company; they are amounts owed to creditors for a past transaction and they usually have the word "payable" in their account title. Along with owner's equity, liabilities can be thought of as a source of the company's assets.

4. Liabilities also include amounts received in advance for future services. 

5.They can also be thought of as a claim against a company's assets. 

For example, a company's balance sheet reports assets of $100,000 and Accounts Payable of $40,000 and owner's equity of $60,000. The source of the company's assets are creditors/suppliers for $40,000 and the owners for $60,000. The creditors/suppliers have a claim against the company's assets and the owner can claim what remains after the Accounts Payable have been paid.

*Examples of liability accounts reported on a company's   balance sheet include

1.notes payable

The amount of principal due on a formal written promise to pay. Loans from banks are included in this account.

2.accounts payable

This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note.

This account is often referred to as trade payable  (as opposite to notes payable, interest payable, etc.)

3.salaries payable

The current liability account which reports the amount of salaries earned by a company's employees, but which have not yet been paid by the company.

4.wages payable

A current liability account that reports the amounts owed to employees for hours worked but not yet paid as of the date of the balance sheet.

5.Accrued expenses payable

This is a current liabilities and Obligations that a company has incurred, but have not yet been routinely recorded in Accounts Payable.

 For example, if the interest on a bank loan is paid on the 10th of each month, then on the last day of each month approximately 20 days of interest expense is an accrued expense payable.

6.warranty liability

This  is an  estimated amount that a company will have to spend to repair or replace a product during its warranty period. 

The liability amount is recorded at the time of the sale. (It is also the time when the expense is reported.) 

The liability will be reduced by the actual expenditures to repair or replace the product. 

Warranty Payable or Warranty Liability is considered to be a contingent liability that is both probable and capable of being estimated.

7.Income taxes payable

It is a current liability account which reflects the amount of income taxes currently due to the tax authority and local governments.

*Classification

Liabilities may be classified into Current and Non-Current. The distinction is made on the basis of time period within which the liability is expected to be settled by the entity.

*Current Liability 

It is a liability in  which the entity expects to pay off within one year from the reporting date.

Example 

1.Trade payable 

2. Accrual

3. Overdraft

4. short term bank loan

5. tax payable

                          

*Non-Current Liability 

It is a  liability in which the entity expects to settle after one year from the reporting date.

Example

1. Long term bank loan
2. bank loan

3. Debenture

It may be appropriate to break up a single liability into their current and non current portions.  

For instance, a bank loan spanning two years and carrying 2 equal installments payable at the end of each year would be classified half as current liability and half as non-current liability at the inception of loan. 

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