Liabilities definition
/What are Liabilities?
Liabilities are legally binding obligations that are payable to another person or entity. Settlement of a liability can be accomplished through the transfer of money, goods, or services. A liability is increased in the accounting records with a credit and decreased with a debit. A liability can be considered a source of funds, since an amount owed to a third party is essentially borrowed cash that can then be used to support the asset base of a business.
Examples of Liabilities
There are many types of liabilities, of which the following are the most common:
Trade payables. These are payables due to an organization’s suppliers.
Accrued liabilities. These are liabilities that have been accrued, since no invoice had yet been received from the supplier as of the end of the reporting period.
Wages payable. These are wages that have been earned by employees as of the end of a reporting period, but not yet paid to them.
Taxes payable. This classification can include many types of taxes, including payroll taxes, income taxes, sales taxes, and use taxes.
Notes payable. This is the interest and principal due on outstanding loans payable to lenders.
Deferred revenue. This is advance payments made by customers on goods or services that have not yet been delivered to them. This obligation is converted into revenue once the associate deliveries have been made.
Presentation of Liabilities
Liabilities are aggregated on the balance sheet within two general classifications, which are current liabilities and long-term liabilities. You would classify a liability as a current liability if you expect to liquidate the obligation within one year. All other liabilities are classified as long-term liabilities. If there is a long-term note or bond payable, that portion of it due for payment within the next year is classified as a current liability. Most types of liabilities are classified as current liabilities, including accounts payable, accrued liabilities, and wages payable.
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Negative Liabilities
It is possible to have a negative liability, which arises when a company pays more than the amount of a liability, thereby theoretically creating an asset in the amount of the overpayment. Negative liabilities tend to be quite small.
Contingent Liabilities
A contingent liability is a potential liability that will only be confirmed as a liability when an uncertain event has been resolved at some point in the future. Only record a contingent liability if it is probable that the liability will occur, and if you can reasonably estimate its amount. The outcome of a lawsuit is a typical contingent liability. If a contingent liability is not considered sufficiently probable to be recorded in the accounting records, it may still be described in the notes accompanying an organization’s financial statements.
Provisions
A provision is a liability or reduction in the value of an asset that an entity elects to recognize now, before it has exact information about the amount involved. For example, an entity routinely records provisions for bad debts, sales allowances, and inventory obsolescence. Less common provisions are for severance payments, asset impairments, and reorganization costs.