In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events,[1] the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.
A liability is defined by the following characteristics:
Any type of borrowing from persons or banks for improving a business or personal income that is payable during short or long time;
A duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services, or other transaction yielding an economic benefit, at a specified or determinable date, on occurrence of a specified event, or on demand;
A duty or responsibility that obligates the entity to another, leaving it little or no discretion to avoid settlement; and,
A transaction or event obligating the entity that has already occurred
Liabilities in financial accounting need not be legally enforceable; but can be based on equitable obligations or constructive obligations. An equitable obligation is a duty based on ethical or moral considerations. A constructive obligation is an obligation that is implied by a set of circumstances in a particular situation, as opposed to a contractually based obligation.
The accounting equation is the mathematical structure of the balance sheet.
Probably the most accepted accounting definition of liability is the one used by the International Accounting Standards Board (IASB). The following is a quotation from IFRS Framework:
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
— F.49(b)
Regulations as to the recognition of liabilities are different all over the world, but are roughly similar to those of the IASB.
Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an IOU.
Liabilities are debts and obligations of the business they represent as creditor's claim on business assets.
Classification
Liabilities are reported on a balance sheet and are usually divided into two categories:
Current liabilities – these liabilities are reasonably expected to be liquidated within a year. They usually include payables such as wages, accounts, taxes, and accounts payable, unearned revenue when adjusting entries, portions of long-term bonds to be paid this year, and short-term obligations (e.g. from purchase of equipment). Current liabilities are obligations whose liquidation is reasonably expected to require the use of current assets, the creation of other current liabilities, or the provision of services within the next year or operating cycle, whichever is longer.
Long-term liabilities – these liabilities are reasonably expected not to be liquidated within a year. They usually include issued long-term bonds, notes payable, long-term leases, pension obligations, and long-term product warranties.
Liabilities of uncertain value or timing are called provisions.
When a company deposits cash with a bank, the bank records a liability on its balance sheet, representing the obligation to repay the depositor, usually on demand. Simultaneously, in accordance with the double-entry principle, the bank records the cash, itself, as an asset. The company, on the other hand, upon depositing the cash with the bank, records a decrease in its cash and a corresponding increase in its bank deposits (an asset).
Debits and credits
A debit either increases an asset or decreases a liability; a credit either decreases an asset or increases a liability. According to the principle of double-entry, every financial transaction corresponds to both a debit and a credit.
When cash is deposited in a bank, the bank is said to "debit" its cash account, on the asset side, and "credit" its deposits account, on the liabilities side. In this case, the bank is debiting an asset and crediting a liability, which means that both increase.
When cash is withdrawn from a bank, the opposite happens: the bank "credits" its cash account and "debits" its deposits account. In this case, the bank is crediting an asset and debiting a liability, which means that both decrease.
^"Definition and Recognition of the Elements of Financial Statements" (PDF). Australian Accounting Standards Board. Retrieved 31 March 2015.
January 12, 2023
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In financial accounting a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events 1 the settlement of which may result in the transfer or use of assets provision of services or other yielding of economic benefits in the future Contents 1 Characteristics 2 Classification 3 Debits and credits 4 See also 5 ReferencesCharacteristics EditA liability is defined by the following characteristics Any type of borrowing from persons or banks for improving a business or personal income that is payable during short or long time A duty or responsibility to others that entails settlement by future transfer or use of assets provision of services or other transaction yielding an economic benefit at a specified or determinable date on occurrence of a specified event or on demand A duty or responsibility that obligates the entity to another leaving it little or no discretion to avoid settlement and A transaction or event obligating the entity that has already occurredLiabilities in financial accounting need not be legally enforceable but can be based on equitable obligations or constructive obligations An equitable obligation is a duty based on ethical or moral considerations A constructive obligation is an obligation that is implied by a set of circumstances in a particular situation as opposed to a contractually based obligation The accounting equation relates assets liabilities and owner s equity Assets Liabilities Owner s EquityThe accounting equation is the mathematical structure of the balance sheet Probably the most accepted accounting definition of liability is the one used by the International Accounting Standards Board IASB The following is a quotation from IFRS Framework 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 F 49 b Regulations as to the recognition of liabilities are different all over the world but are roughly similar to those of the IASB Examples of types of liabilities include money owing on a loan money owing on a mortgage or an IOU Liabilites of sectors of USA economy 1945 2017 based on flow of funds statistics of the Federal Reserve System Liabilities are debts and obligations of the business they represent as creditor s claim on business assets Classification EditLiabilities are reported on a balance sheet and are usually divided into two categories Current liabilities these liabilities are reasonably expected to be liquidated within a year They usually include payables such as wages accounts taxes and accounts payable unearned revenue when adjusting entries portions of long term bonds to be paid this year and short term obligations e g from purchase of equipment Current liabilities are obligations whose liquidation is reasonably expected to require the use of current assets the creation of other current liabilities or the provision of services within the next year or operating cycle whichever is longer Long term liabilities these liabilities are reasonably expected not to be liquidated within a year They usually include issued long term bonds notes payable long term leases pension obligations and long term product warranties Liabilities of uncertain value or timing are called provisions When a company deposits cash with a bank the bank records a liability on its balance sheet representing the obligation to repay the depositor usually on demand Simultaneously in accordance with the double entry principle the bank records the cash itself as an asset The company on the other hand upon depositing the cash with the bank records a decrease in its cash and a corresponding increase in its bank deposits an asset Debits and credits EditA debit either increases an asset or decreases a liability a credit either decreases an asset or increases a liability According to the principle of double entry every financial transaction corresponds to both a debit and a credit When cash is deposited in a bank the bank is said to debit its cash account on the asset side and credit its deposits account on the liabilities side In this case the bank is debiting an asset and crediting a liability which means that both increase When cash is withdrawn from a bank the opposite happens the bank credits its cash account and debits its deposits account In this case the bank is crediting an asset and debiting a liability which means that both decrease See also EditAssets Cost Contingent liability Depreciation Financial Accounting Overhead business References Edit Definition and Recognition of the Elements of Financial Statements PDF Australian Accounting Standards Board Retrieved 31 March 2015 Retrieved from https en wikipedia org w index php title Liability financial accounting amp oldid 1129707219, wikipedia, wiki, book, books, library,
