liability

Examples of liability in the following topics:

• Reporting Current Liabilities

  • Current liabilities are reported first in the liability section of the balance sheet because they have first claim on company assets.
  • Liabilities are disclosed in a separate section that distinguishes between short-term and long-term liabilities.
  • In addition to current liabilities, long-term liabilities are listed in a separate section after current debt.
  • However, for all long-term liabilities, any amounts due in the current fiscal year are reported under the current liability section.
  • Current liabilities is the first section reported under liabilities on the balance sheet.

• Reporting Long-Term Liabilities

  • This is an example of a long-term liability.
  • "Notes Payable" and "Bonds Payable" are also examples of long-term liabilities, and they often introduce an interesting distinction between current liabilities and long-term liabilities presented on a classified balance sheet.
  • Continuing one year forward, Company X would report a current liability of 20,000 and a long-term liability of 60,000 on its balance sheet as of 12/31/2014.
  • What this example presents is the distinction between current liabilities and long-term liabilities.
  • Despite a Note Payable, Bonds Payable, etc., starting out as a long-term liability, the portion of that debt that is due within a year has to be backed out of the long-term liability and reported as a current liability.

• Defining Current Liabilities

  • Liabilities are reported on the balance sheet, along with assets and owner's equity.
  • A liability is defined by one of the following characteristics:
  • A current liability can be defined in one of two ways: (1) all liabilities of the business that are to be settled in cash within a firm's fiscal year or operating cycle, whichever period is longer or (2) all liabilities of the business that are to be settled by current assets or by the creation of new current liabilities.
  • A current liability, such as a credit purchase, can be documented with an invoice.
  • Current liabilities are debt owed and payable no later than the current accounting period.

• Current Maturities of Long-Term Debt

  • The portion of long-term liabilities that must be paid in the coming 12-month period are classified as current liabilities.
  • Long-term liabilities are liabilities with a due date that extends over one year, such as a notes payable that matures in 2 years.
  • In accounting, the long-term liabilities are shown on the right side of the balance sheet, along with the rest of the liability section, and their sources of funds are generally tied to capital assets.
  • The portion of long-term liabilities that must be paid in the coming 12-month period are classified as current liabilities.
  • The portion of the liability considered "current" is moved from the long-term liabilities section to the current liabilities section.

• Classifying Liabilities

  • Liabilities are classified in different types.
  • The two main categories of these are current liabilities and long-term liabilities.
  • Current liabilities are often loosely defined as liabilities that must be paid within a single calender year.
  • A better definition, however, is that current liabilities are liabilities that will be settled either by current assets or by the creation of other current liabilities.
  • Contingent liabilities can be current or long-term.

• Defining Liabilities

  • A liability is defined as an obligation of an entity arising from past transactions/events and settled through the transfer of assets.
  • A liability is defined by the following characteristics:
  • 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.
  • Long-term liabilities have maturity dates that extend past one year, such as bonds payable and pension obligations.

• Analyzing Long-Term Liabilities

  • Analyzing long-term liabilities combines debt ratio analysis, credit analysis and market analysis to assess a company's financial strength.
  • Long-term liabilities are obligations that are due at least one year into the future, and include debt instruments such as bonds and mortgages.
  • Analyzing long-term liabilities is done for assessing the likelihood the long-term liability's terms will be met by the borrower.
  • After analyzing long-term liabilities, an analyst should have a reasonable basis for a determining a company's financial strength.
  • Typically, company's present liabilities with the earliest due dates first.

• What Goes on the Balances Sheet and What Goes in the Notes

  • The balance sheet lists current liability accounts and their balances; the notes provide explanations for the balances, which are sometimes required.
  • Assets, liabilities, and the equity of stockholders are listed as of a specific date, such as the end of a fiscal year or accounting period.
  • Balance sheets are presented with assets in one section, and liabilities and equity in the other section, so that the two sections "balance. " The fundamental accounting equation is: assets = liabilities + equity ([).
  • Current liabilities and their account balances as of the date on the balance sheet are presented first, in order by due date.
  • Current liability information found in the notes to the financial statements provide additional explanation on the liability balances and any circumstances affecting them.

• Reporting Contingencies

  • Contingencies are reported as liabilities if it is probable they will incur a loss, and their amounts can be reasonably estimated.
  • The amount for repairs occurring in year one is reported in the current liability section of the balance sheet; the portion relating to major repairs in three years is disclosed as long-term liability.
  • As the warranty claims are made, the liability account is debited and cash is credited for the cost of the repair.
  • The long-term liability warranty provision is moved to the current liability section in the accounting period occurring three years after the product sale.
  • Such contingent liabilities can be estimated reliably based on historical cost and readily available information.

• Fundamental Accounting Equation

  • To ensure that a company is "in balance," its assets must always equal its liabilities plus its owners' equity.
  • A mark in the credit column will increase a company's liability, income and capital accounts, but decrease its asset and expense accounts.
  • A mark in the debit column will increase a company's asset and expense accounts, but decrease its liability, income and capital account.
  • The total assets listed on a company's balance sheet must equal the company's total liabilities, plus its owners' equity in the company.
  • As you can see, the business's total assets equal the company's total liabilities and equity.