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Characteristics of Liabilities

Name

Institution Affiliation
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Businesses talk about liabilities when they refer to an obligation that they owe to a party

outside the organization. These obligations are usually paid in cash in the future but at times, the

organization can settle these liabilities by conveying assets or services. Generally, liabilities are

classified as current and non-current and their major difference is a function of time (Hoyle &

Open Textbook Library, 2015). As a function of time, debts that must be settled by one year are

current and those payments that will not be paid within an interval of one year are non-current.

There are several characteristics that liabilities must satisfy for them to be recognized as

liabilities. First, there must be a probable future sacrifice (Hoyle & Open Textbook Library,

2015). It is not a must that an obligation is absolute before recognition is required but it only

requires future sacrifice to be probable which in turn leaves a degree of uncertainty. Second,

liability can only be reported if it results from a past event or a transaction (Hoyle & Open

Textbook Library, 2015). For instance, if an employee worked for an organization and is not yet

paid their salaries, then the company has an obligation. It is so because work is a past event that

creates the obligation. In the same way, a supplier who supplied a company with raw materials

by a firm and has not yet been paid is owed and this is a liability on part of the company. Third, a

present obligation is created by a past event or transaction and this means that a potential debt

does not qualify as a liability (Hoyle & Open Textbook Library, 2015). It is a question of what

actually happened and when did it happen and this is what is highlighted in the above examples.

Paying the supplier and the worker is an obligation because they supplied raw materials and

labor in the past, respectively.

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References

Hoyle, J. B., & Open Textbook Library,. (2015). Financial accounting. Minneapolis, Minnesota :

University of Minnesota Libraries Publishing, Minneapolis : Open Textbook Library