What are liabilities in the statement of financial position?

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Liability is one main element in the financial statements presented in the statement of financial position or balance sheet. Liabilities consist of current and non-current liabilities.

Based on the conceptual framework, an essential characteristic of a liability is that the entity has a present obligation. An obligation is a responsibility or duty to perform or act in a certain way. In addition, the obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. This is normally the case, for example, with amounts payable for goods and services received.

Moreover, the obligations also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. This means that the liabilities result from past transactions or other events; for example, the acquisition of goods and the use of services give rise to trade payables (unless paid for in advance or on delivery) and the receipt of a bank loan results in an obligation to repay the loan.

Section 4.16 of the conceptual framework states that a distinction needs to be drawn between a present obligation and a future commitment. A decision by the management of an entity to acquire assets in the future does not, of itself, give rise to a present obligation. An obligation normally arises only when the asset is delivered or the entity enters into an irrevocable agreement to acquire the asset. In the latter case, the irrevocable nature of the agreement means that the economic consequences of failing to honour the obligation, for example, because of the existence of a substantial penalty, leave the entity with little, if any, discretion to avoid the outflow of resources to another party.

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Further, section 4.17 of the conceptual framework also said that the settlement of a present obligation usually involves the entity giving up resources embodying economic benefits in order to satisfy the claim of the other party.

Current liabilities

As you can see from the definition of liabilities, current liabilities are the present obligation that arise from the past event that an entity liable to pay within or less than one year. They are the claim that need to be paid within or less than one year. One example of current liabilities is Trade Payable. For example, company XYZ bought inventory on credit which need to be paid within 30 days. In accordance with the definition above, it is considered as Trade Payable because the obligations to pay is within or less than one year period.

Current liabilities consist of Trade Payable, Short Term Note Payable, Salary Payable, and other accruals etc…

Non-current liabilities

Non-current liabilities are present obligations that arise from past events. They are the claim that an entity need to be paid more than one year period. Non-current liabilities may have both a current and non-current portion. For example company XYZ borrow a bank loan for 5 years. The bank loan is considered as non-current liability or long term liability; however, as the payment of the loan is based on the monthly basis, the portion that need to be paid within one year is considered as current liability while the portion of repayments over one years are considered as non-current liability.

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Non-current liabilities consist of long term note payable, long term loan, pension liabilities, bond payable, post retirement benefit, deferred income tax payable and long term customer deposit etc…

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