Defining Liabilities

A liability is defined as an obligation of an entity arising from past transactions/events and settled through the transfer of assets.

Learning Objective

Explain how to identify a liability

Key Points

Some of the characteristics of a liability include: a form of borrowing, personal income that is payable, a responsibility to others settled through the transfer of assets, a duty obligated to another without avoiding settlement, and a past transaction that obligates the entity.
The IASB's definition of 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.
Types of liabilities found in the balance sheet include current liabilities, such as payables and deferred revenues, and long-term liabilities, such as bonds payable.

Terms

deferred
Of or pertaining to a value that is not realized until a future date (e.g., annuities, charges, taxes, income, either as an asset or liability.
obligation
A legal agreement stipulating a specified payment or action; the document containing such agreement.
fiscal year
An accounting period of one year, not necessarily coinciding with the calendar year.

Full Text

Liability Definition & Characteristics

In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, 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 in the current or long term.
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 due 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.
A transaction or event that has already occurred and which obligates the entity.

Liability Defined by the IASB

Probably the most accepted accounting definition of a liability is the one used by the International Accounting Standards Board (IASB). The following is a quotation from the International Financial Reporting Standards (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. "

Examples of Liabilities

Types of liabilities found on a company's balance sheet include: current liabilities like notes payable, accounts payable, interest payable, and salaries payable. Liabilities can also include deferred revenue accounts for monies received that may not be earned until a future accounting period. An example of a deferred revenue account is an annual software license fee received on January 1 and earned over the course of a year. The company's fiscal year end is May 31. For the current fiscal year, the company will earn 5/12 of the fee and the remaining amount (7/12) stays in a deferred revenue account until it is earned in the next accounting period. Long-term liabilities have maturity dates that extend past one year, such as bonds payable and pension obligations.

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