Meaning and Types of Liabilities

Liability is a legal obligation of an individual or a business entity towards creditors arising out of some transactions. A more clear-cut definition of liability signifies it as a claim by the creditors against the assets and legal obligations of an individual or entity resulting from the past or current transactions and events.

Types of Liabilities

Liabilities imply a duty or responsibility to pay on demand or on an occurrence of certain transaction or event. Liabilities also arise from borrowings which may be made to improve business or personal income and are paid back over an agreed period of an interval, which may be of the short period or long period.

Liabilities are mentioned on the left-hand side of a Balance Sheet below Equity Capital. Just like assets, liabilities are also represented in a sequence in the Balance Sheet. Liabilities are grouped and classified according to their nature and time period. Some common types of liabilities include current liabilities, long-term liabilities and contingent liabilities. Let us have a look at them:

Current Liabilities or Short Term Liabilities

Liabilities which are normally due and payable within one year are grouped as current liabilities. These liabilities are also known as short-term liabilities as they become due within a shorter period (say within 1 year). Creditors, salaries and wages payable, gratuity or bonus payable, interest payable, bills payable, sundry creditors, bank overdraft or cash credit, unclaimed dividends, pre-received incomes, sales tax payable, income tax payable, provisions, other taxes payable, accrued expenses, instalments due within 1 year for term loans, etc. are all examples of current liabilities.

Long Term Liabilities

Liabilities which are not immediately due but become due after a year or more are classified as long-term liabilities. Long term bank loans like term loans, debentures, deferred tax liabilities, mortgage liabilities (payable after 1 year), lease payments examples of long-term liabilities. Interest payable is also treated as the long-term liability if interest is payable on maturity.

Contingent Liabilities

Certain liabilities are payable on the occurrence of some event or contingency. Contingency signifies something which may or may not take place. If a liability is due on happening of such an event, it is termed as the contingent liability. Default in supply, breach of contract, damage to the environment or to the prestige of some person or entity, an outcome of accidents and other law-suits, are examples of some such cases where a liability is contingent to occur. Such liabilities are calculated on the basis of “what if the actual loss occurs” where ever possible and with an addition of a notional calculation of damage occurred to the person or entity. Generally, these liabilities are not included in the Balance Sheet but are mentioned separately as a note to the balance sheet.

Last updated on : March 1st, 2017
What’s your view on this? Share it in comments below.

One Response

  1. moses titi

Leave a Reply

Capitalizing Versus Expensing Costs
  • Fund Flow Statement
    Fund Flow Statement
  • Notes Payable
    Notes Payable
  • What is Debit and Credit – An Easy to Understand Explanation
    What is Debit and Credit – An …
  • What is Expense? – Definition and Meaning
    What is Expense? – Definition and Meaning
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    debits and credits in bankingbills receivable account formatdefine payout ratiogaap operating leasedifference between ebit and ebitdavshiremeaning of bonds and debentureswhat does mitigant meanleasing software definitionifrs finance leasedebt financing advantages and disadvantagesmerchandise inventory turnoveradvantages and disadvantages of zero based budgetingexplain debenturesdifference between incremental and differentialreceivables days formulaadvantages and disadvantages of sale and leasebackstock turns calculationfixed debentureexamples of selling and administrative expensesdisadvantages of investing in stock marketapproaches to finance functiondebits and credits rulesbudgeting methodologieswhat is abc analysis in inventory management with exampleagency debentureoperating levergetypes of equity financeactivity based budgeting disadvantagesnon redeemable bondassumption of eoq modeldouble entry for debtorshow to calculate stock turnover rateinterpretation of roewhat is redemption of debenturesmeaning of marginal costingratio of fixed assets to long-term liabilitiescapital rationing definitionbank hypothecationlevered firm definitiondebt covenant definitionwhat is od limit in bankingretained earnings calculatorwhat is fixed cost and variable cost with examplediscount rate capital budgetingdscr calculatordebt covenant definitiondifference between npv and irrdifferentiate between fixed cost and variable costsimplified straight line depreciationtimes interest earned ratio formularepayment capacity ratiocalculation of rocebond callablecoupon bearing bondformula ebitdagordon growth model calculatorvariable cost and fixed cost examplesinventory days calculation formulawhat affects gross marginytm calculationideal stock turnover ratioadvantages and disadvantages of bank creditcapital lease vs loandifference between irr and mirrmeaning of tangible and intangible assetsdecoupling stockaccounting npvadvantages of payback methodwhat is the definition of overdraftcapm and cost of equitycapital budgeting involveszero based budgeting personal financeaccounts payable period formulaformula to calculate internal rate of returndebtor collection periodformula for turnover ratioratio analysis involves analyzing financial statements