Liabilities

Liabilities

Liabilities are the obligation which needs to be fulfilled by the entity. In simplest word the liability is a due amount to be paid. Some important characteristics of liabilities are

a)    Liabilities are present obligation.

b)   Liabilities require flow for settlement.

c)    Liabilities arise from past event.

Example of Liabilities

Some important examples of liabilities are

a)    Long term loan.

b)   Trade payable.

c)    Accrued expenses.

d)   Interest payable.

e)    Income tax payable.

f)     Advance or unearned revenue.

Recognition of Liabilities

Liabilities are recognized in the books of account on fulfillment of the following conditions

a)    Liability qualifies the definition.

b)   Liability can be measured reliably.

Recording of Liabilities

Increase in liabilities shall be credited, while decrease in liabilities shall be debited. This rule for liabilities has been explained with below examples

a)    Salary payable amounting 90,000.

b)   Machinery purchased 100,000 on credit from Ali.

Salary is expense and debited, while salary still to be paid, thus a liability is created by crediting the salary payable account.

Date	Particular	Folio	Dr.	Cr.
23.09.2016	Salary		90,000
23.09.2016	Salary payable A/c			90,000

Machinery purchased is an increase in asset, therefore it the machinery account is debited, while a liability has arisen due this purchase and therefore Ali Account is credited for increase in liability.

Date	Particular	Folio	Dr.	Cr.
10.10.2016	Machinery A/c		100,000
10.10.2016	Ali A/c			100,000

 Current & Non Current Liabilities

Liabilities which are expected to settle within a period of 12 months (within a year) is known current liabilities, all other liabilities are classified as non current liabilities.