Definition
Liabilities are
probable future scarifies of economic benefits stemming from present legal,
equitable or constructive obligations of a particular enterprises to transfer assets
or provide services to other entities in the future as a result of past
transactions or events affecting the enterprises.
The international accounting standard board defined liability as 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.
Characteristics
- A legal, equitable or constructive duly or responsibility entails satisfaction of settlement by future transfer or use of assets at a specified event or on demand.
- The duty or responsibility obligates a particular enterprise, leaving it little or no discretion to avoid the future sacrifice. Legal enforceability is not a prerequisite for an obligation to qualify as a liability.
- The transaction or other event obligating the enterprise has already happened.
Once incurred, a
liability continues as liability until the enterprises settle it, or another
event or circumstance discharges it or removes the enterprises responsibility
to settle it.
Classification of liabilities
Liabilities may be classified under two headings
1) Current
Liabilities
2) Non-current
Liabilities
Non-current Liabilities
Liabilities
repayable after specific duration of long period of time are called Non-current
liabilities. They do not become due for payment in the
ordinary ‘operating cycle’ of business or within a short period of lime. Examples
are long term loans and debentures. Long term liabilities may be secured or unsecured,
though usually they are secured.
Current Liabilities
Liabilities
which are repayable during the operating cycle of business, usually within a
year, are called short term liabilities or current liabilities. They are paid
out of current assets or by the creation of other current liabilities. Examples
of current liabilities are trade creditors, bills payable, outstanding expenses,
bank overdraft, taxes payable and dividends payable.