Liabilities

Definition

A present obligation of the entity to transfer an economic resource as a result of past events.

Three Criteria of Definition

1. Present obligation: A duty to act or perform in a certain way in the future.
2. Transfer of economic resources: Could involve cash settlement, or the provision of goods or services.
3. Past event: The event must have already occurred; the intention to do something in the future is not adequate.

Current vs. Non-Current Liabilities

Liabilities are generally classified as current or non-current according to the timing of the payment.

• Current liabilities: Obligations expected to be settled within one year (12 months). Critical for managing short-term financial obligations and liquidity.
• Non-current liabilities: Obligations expected to be settled beyond one year (12 months). Essential for long-term financial planning and stability.

Examples

• Current: Accounts Payable, Overdraft, Credit Card
• Non-current: Bank Loan (if repayable beyond 12 months)

Debit and Credit

Increased by a credit, decreased by a debit. Normal balance: credit. See Debit and Credit.