obligation

Examples of obligation in the following topics:

• Defining Liabilities

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

• Being Aware of Off-Balance-Sheet Financing

  • Off-Balance-Sheet-Financing represents rights to use assets or obligations that are not reported on balance sheets to pay liabilities.
  • A parent company may not be required to consolidate a subsidiary into its financial statements for reporting purposes; however the parent company may be obligated to pay the unconsolidated subsidiaries liabilities.
  • A liability is not recognized on the lessee's balance sheet even though the lessee has the obligation to pay an agreed upon amount in the future.

• Defining Current Liabilities

  • 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 future economic benefits.
  • A duty or responsibility that obligates the entity to another entity, with no option to avoid settlement.
  • A transaction or event that has already occurred and obligates the entity .

• Gain Contingencies

  • Gain contingencies, or possible occurrences of a gain on a claim or obligation involving the entity, are reported when realized (earned).
  • Gain contingencies, or the possible occurrences of a gain on a claim or obligation that involves the entity, are reported when realized (earned).

• Terminology of Accounting

  • An example of an accrued expense is a pending obligation to pay for goods or services received from a counterpart, while cash is to be paid out in a latter accounting period when the amount is deducted from accrued expenses.
  • A liability is an obligation of an entity arising from past transactions, the settlement of which may result in the transfer of assets, provision of services, or other yielding of economic benefits in the future.
  • A responsibility that obligates the entity to another, leaving it little or no discretion to avoid settlement, or
  • A transaction or event obligating the entity that has already occurred.

• Current Obligations Expected to Be Refinanced

  • Per FASB 6, current obligations that an enterprise intends and is able to refinance with long term debt have different reporting requirements.
  • Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms.

• Reporting Contingencies

  • Probable is defined as more than 50% likely to occur due to a past obligation.
  • The past obligating event defines a future payment event as a payment due on a specific date from the company, who is linked to an obligating event by a specific agreement.
  • A loss contingency is less than 50% likely to occur due to a past obligation.

• Importance of Recognition and Measurement

  • Cash can be received before or after obligations are met—when goods or services are delivered.
  • According to the matching principle in accrual accounting, expenses are recognized when obligations are incurred—regardless of when cash is paid out.
  • Cash can be paid out in an earlier or later period than the period in which obligations are incurred.
  • According to the principle, expenses are recognized when obligations are:
  • In cash accounting, on the other hand, expenses are recognized when cash is paid out, regardless of when obligations are incurred through transfer of goods or rendition of services.

• Current Ratio

  • If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations (current liabilities).
  • While a low current ratio may indicate a problem in meeting current obligations, it is not indicative of a serious problem.
  • If an organization has good long-term revenue streams, it may be able to borrow against those prospects to meet current obligations.

• Importance of Cash Flow Accounting

  • Without positive cash flow, a company cannot meet its financial obligations .
  • Management is interested in the company's cash inflows and cash outflows because these determine the availability of cash necessary to pay its financial obligations.