Knowledge Seeker

What is Liabilities and their types

liabilities are claims of outsiders against the business. In other
words, these are amounts owed by the business to people who have lent money

or provided goods or services on credit. If these liabilities are due within an accounting
period or the operating cycle of the business, they are classified as current liabilities.
Most of such liabilities are incurred in the acquisition of materials or services forming
part of the current assets. As was the case with current assets, current liabilities are
also listed in the order of their relative liquidity.

Other Types Of Liabilities

Accounts Payable
Accounts Payable or sundry creditors are usually unsecured debts owed by the firm.
These are also referred to as payables on open accounts. They may not be evidenced
by any formal written acceptance or promise to pay. They represent credit purchase of
goods or services for which payment has not been made as on the date of the balance
sheet.
Accrued Liabilities
Accrued liabilities represent expenses or obligations incurred in the previous
accounting period but the payment for the same will be made in the next period. In
many cases where payments are made periodically, such as wages, rent and similar
items, the last month’s payment may appear as accrued liabilities (especially if the
practice is to pay the same on the first working day of a month). This obligation
shown on the balance sheet indicates that the firm owed the said amount on the
balance sheet date

Provisions or Estimated Liabilities
Where the liabilities are known but the amounts cannot be precisely determined, we
estimate the liability and provide for it as a liability. A common example is income
tax payable. Unless the tax liability is determined the amount payable cannot be
accurately determined. There could be other examples too, such as product warranty
expenses to be met and so on. The common practice is to estimate these liabilities
based on past experience and make a provision for the same which is shown as a part
of liabilities.

Contingent Liabilities
Contingent liabilities should be distinguished from estimated liabilities. Estimated
liabilities are known liabilities where the amount is uncertain. Contingent liabilities on
the other hand are not liabilities at the current moment. They may become liabilities
only on the happening of a certain event. In other words, both the amount and the
liability (or obligation) are uncertain till the specified event occurs in future. These
may include items like a claim against the company contested in a court. Only if the
court gives an unfavourable verdict, it becomes a liability. They are not listed as
liabilities in the body of the balance sheet. However, if the firm wishes, it may make
same provision for the same.

Long-Term Liabilities
Long-term liabilities are usually for more than one year. They cover almost all the
outsider’s liabilities not included in the current liabilities and provisions. These
liabilities may be unsecured or secured. Security for long-term loans, are usually the
fixed assets owned by the firm assigned to the lender by a pledge or mortgage. All
details such as interest rate, repayment commitment and nature of security are
disclosed in the balance sheet. Usually, such long-term liabilities include debentures
and bonds, borrowings from financial institutions and banks.

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