Liabilities and Their Classification

Today we are going to learn

  • What is the Liability?
  • Classification of Liabilities.

 What is the Liability?

The sacrifice against the acquisition of property and services is usually a liability.

The amount that has not yet been paid will have to be paid in the future against the acquisition of property and services from another person or institution is called a liability.

The amount payable will be the liability of the businessman or business entity.

Any legitimate claim against a business’s property is called a liability. Liability generally refers to the outside.

Examples of Liabilities are Capital, Provident fund, Accounts payable, Notes Payable, Bank overdraft, Bank Loan, Expenses Payable, etc.

Classification of Liabilities

The different types of liabilities are as follows

1. Internal Liabilities

The liability of the owner or owner of the organization or the liability of the company to the shareholders is referred to as internal liability.

Internal liability is the sum of the debts of the owner of the business. Accepted by the owners or shareholders, on payment or refund.

This type of liability is usually the result of the concept of a business entity.

Examples of Internal Liabilities:

  • Capital
  • Share Capital
  • Reserve Fund
  • Share Premium
  • Pension Fund
  • Bonus Fund
  • Welfare fund
  • Retained Earnings

2. External Liabilities

The aggregate of the debts owed by the organization to any party other than the owner of the business is referred to as external liability.

The sum of current liabilities and long-term liabilities is referred to as external liabilities.

Examples of External liabilities:

  • Accounts Payable
  • Bank Loan
  • Bank Overdraft
  • Liability for Guarantee

2.1. Current Liability

A liability that is limited to a short term, two or three months, a maximum of one year and a fixed period is referred to as the current liability.

Current liabilities or short-term liabilities are all liabilities that need to be repaid in an account or in a short period of time.

Examples of Current Liabilities:

  • Accounts Payable
  • Notes Payable
  • Unearned Revenue
  • Bank Overdraft
  • Expenses Payable
  • Short Term Loan

2.2. Long-term Liability

Long-term liabilities are generally referred to as long-term liabilities created for two or three years or more.

Liabilities that generally do not require payment within one year or are accepted for multiple accounting periods are defined as permanent or long-term liabilities.

These liabilities are commonly used for capital expenditure.

Examples of Long Term Liabilities

  • Bank Loan
  • Mortgage Loan
  • Debenture
  • Other Long-term Liabilities

 2.3. Contingent Liability

A liability which is subject to an event, that is, an event which may or may not be regarded as a liability to a business, maybe regarded as contingent or uncertain liability.

Claims that may be considered future business liabilities are considered contingent liabilities.

Contingent Liability is considered to be a liability, in accordance with the principle of conservatism.

According to the principles of full disclosure, contingent liability is to be shown as a footnote in the Balance sheet.

Examples of contingent Liabilities:

  • Liability for Guarantee
  • Liability for awaiting the court’s Judgment
  • Liability for Discounting Bills/Notes
Liabilities and Their Classification
Pic: Liabilities and their Classification

I think you’re clear about the liabilities and their classification after reading this article.

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