Information Sheet 3.1.

List the Chart Account Title: Liability

Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
 Identify what is Liability
 Distinguish what are the classifications of Liability
 Prepare and list the Liability Accounts

Introduction:

In general, a liability is an obligation between one party and another not yet

completed or paid for. In the world of accounting, a financial liability is also an

obligation but is more defined by previous business transactions, events, sales,

exchange of assets or services, or anything that would provide economic benefit

at a later date. Liabilities are a vital aspect of a company because they are used

to finance operations and pay for large expansions. They can also make

transactions between businesses more efficient. For example, in most cases, if

a wine supplier sells a case of wine to a restaurant, it does not demand

payment when it delivers the goods. Rather, it invoices the restaurant for the

purchase to streamline the drop-off and make paying easier for the restaurant.

The outstanding money that the restaurant owes to its wine supplier is

considered a liability. In contrast, the wine supplier considers the money it is

owed to be an asset.
Liabilities are categorized as current or non-current depending on their

temporality. They can include a future service owed to others (short- or long-

term borrowing from banks, individuals, or other entities) or a previous

transaction that has created an unsettled obligation. The most common

liabilities are usually the largest like accounts payable and bonds payable.

Most companies will have these two line items on their balance sheet, as they

are part of ongoing current and long-term operations.

Current liabilities are a company's short-term financial obligations that are due

within one year or a normal operating cycle (e.g. accounts payable).

Long-term (non-current) liabilities are obligations listed on the balance sheet

not due for more than a year.

https://www.investopedia.com/terms/l/liability.asp).
 Self- Check 3.1.3

Multiple Choice: Read the questions provided. Ensure that you fully
understand what is being asked. Choose and encircle the letter
of your answer that you believe to be the most accurate or
appropriate response to the question.

1. What is a financial liability in accounting?

a) An asset
b) An obligation arising from business transactions
c) A revenue source
d) A long-term investment

2. Why are liabilities important for a company?

a) They represent ownership of the company.

b) They finance operations and expansions.
c) They are always considered assets.
d) They have no impact on business transactions.

3. In the context of a wine supplier selling wine to a restaurant, what does

the restaurant's outstanding payment to the supplier represent?

a) An asset
b) A liability
c) An expense
d) A revenue
4. What determines whether a liability is categorized as current or non-
current?

a) Its size
b) Its complexity
c) Its temporality
d) Its industry

5. Which of the following is an example of a current liability?

a) A loan due in two years

b) Accounts payable
c) Long-term bonds
d) Equipment purchase

6. Long-term liabilities, as listed on the balance sheet, are typically due:

a) Within one year

b) In the next 5 years
c) More than a year from the balance sheet date
d) Within the current operating cycle

7. What are the most common liabilities found on a company's balance

sheet?

a) Accounts receivable and inventory

b) Short-term investments and cash
c) Accounts payable and bonds payable
d) Long-term assets and retained earnings

8. When an obligation is considered a long-term liability?

a) When it's due within one year

 b) When it's due within the next 5 years
c) When it's due more than a year from the balance sheet date
d) When it's due within the current operating cycle

9. How do liabilities impact transactions between businesses, as mentioned

in the passage?

a) They complicate transactions.

b) They have no effect on transactions.
c) They streamline transactions and make payments easier.
d) They only affect large expansions.

10. Current liabilities, as listed on the balance sheet, are typically due:

a) Within one year

b) In the next 5 years
c) More than a year from the balance sheet date
d) Within the current operating cycle
 ANSWER KEY 3.1.3

1. B
2. B
3. B
4. C
5. B
6. C
7. C
8. C
9. C
10. A