The Concept of liability is also a critical part in preparing the Financial Statements.
Based on the Conceptual Framework, the main essential characteristic of liabilities are that the entity has a present obligation.
Conceptual Framework also stated that the obligation could be a duty or responsibility to act or perform in a certain way.
Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement.
For example, the entity purchasing goods or rendering services from suppliers on credit and the cost of goods or services will be payable in the next 30 days.
This transaction creates a legal binding between an entity and suppliers. Such liabilities called account payable and class as current liabilities.
Loan payable, overdraft, accrual liabilities, and notes payable are the best example of liabilities.
But, these liabilities are differently classified as current liabilities (mean short term), and non-current liabilities( mean long term). We will discuss later in this article.
Assets = Liabilities + Equity
Therefore, to calculated liabilities, we can turn as follow:
Liabilities = Assets – Equity
+ Assets: In the balance sheet, assets records at the first class and total assets in the balance sheet show the total amount of net assets that entity have at the end of the balance sheet date.
+ Liabilities here included both current and non-current liabilities that entity owe to its debtors at the end of balance sheet date.
+ Equity is the investment fund that owners injected into the entity.
In the Statement of Financial Position, Liabilities are classed into two categories according to their nature. Those two classifications are Current Liabilities and Non-Current Liabilities.
Type of Liabilities
The following video explaining the concept of Liabilities. In case you still not clearly understand from the text provided, we recommended you to review the video for better understanding.
The following are the list of Current Liabilities items that normally found in the Statement of Financial Position.
- Account Payable as the result of purchasing the goods or rendering of service on credit. In such credit, purchases are expected to pay with the short time period which is normally less than twelve months. If the expenses of the payable period are longer than twelve months, then this payable are class as long term.
- Overdraft from as the result of overdraw from the bank. The company normally has the overdraft facilities with the banks, and interests are cover only for the overdrawn amount at the time the company withdraws money from the bank to the time settlement.
- Current Tax payable: The tax expenses that the company willing to pay in the period of shorter than 12 months. Current Tax payable is resulted from any kind of tax like salaries, VAT, withholding tax, prepayment tax, and monthly tax on profit.
- Accrual Expenses as the result of expenses that occurred, but the invoices or credit notes have not been received. For example, utility expenses, the invoice normally receive at the beginning of the next month. Therefore, the accrual expenses have to be recognized.
- Interest Expenses that the company willing to pay no longer than 12 months.
- Short-term Debt that the company willing to pay no longer than 12 months.
- Others Current liabilities are the other type of small payable.
The following are the list of Non-Current Liabilities items that normally found in the Statement of Financial Position.
- Long-Term Debt: The debt that overdue over the 12 months period. The terms and conditions of the debt are normally found in the debt agreement. For those balance and amount need to be paid within 12 months, that amount needs to be classed as Current Liabilities and the rest are classed as Non-Current Liabilities.
- Noted Payable Over 12 Months. Sometimes the company purchase goods or the rendering of service from suppliers and the term of payments is over one year; therefore, this Noted Payable are class as long term.
- Bond Payable, the obligation of the company to pay the bond over the 12 months.
- Long-term Lease: is the transaction to a records finance lease, the lease should be classified as long term and short term. Now the standard has changed the accounting treatment for operational lease and finance lease.
Written by Sinra