Liabilities


Definition

According to IASB Frmework liability is defined as follows:

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 (IASB Framework).

Explanation

In simple words, liability is an obligation of the entity to transfer cash or other resources to another party.

Liability could for instance be a bank loan, which obligates the entity to pay loan installments over the duration of the loan to the bank along with the associated interest cost. Alternatively, an entity's liability could be a trade payable arising from the purchase of goods from a supplier on credit.

Classification

Liabilities may be classified into Current and Non-Current. The distinction is made on the basis of time period within which the liability is expected to be settled by the entity.

Current Liability is one which the entity expects to pay off within one year from the reporting date.

Non-Current Liability is one which the entity expects to settle after one year from the reporting date.

Types and examples

Following are examples the common types of liabilities along with their usual classifications.

LiabilityClassification
Long Term Bank LoanNon-current
Bank Overdraftcurrent
Short Term Bank Loancurrent
Trade Payablescurrent
DebentureNon-current
Tax PaybleCurrent

It may be appropriate to break up a single liability into their current and non current portions. For instance, a bank loan spanning two years and carrying 2 equal installments payable at the end of each year would be classified half as current and half as non-current liability at the inception of loan.