Liabilities in accounting
Introduction
Accounting requires that liabilities are considered important since it is one of the most critical components of financial accounting. Liabilities may be defined as currently existing obligations that an entity intends to meet at some time in the future (Huian, 2012). Liability is characterized as the future sacrifices of the organization instead of the economic benefits. The entity is obliged to make several transactions out of the results of the past transactional events. The scope of this essay will entail a discussion on the main characteristics of liabilities. The paper will also allude to the importance of classifying liabilities into either long-term or short term.
Characteristics of liabilities
There are three main characteristics of liabilities in accounting (Wild, Shaw & Chiappetta, 2015). First, Liabilities are the duties and responsibilities of the organization. Therefore, to justify, every organization is obligated to gather for all its liabilities in the process of making profits. This is immensely imperative considering the organization’s responsibilities to its stakeholders and shareholders who account for the performance of an organization. In the end, the company’s performance will be a reflection of how the organization approached the issue of liabilities.
Secondly, Liabilities are the occurrence of past transactions or events. For instance, for a particular to be referred to as a liability, it must have risen from a transaction undertaken by the organization in the past. Thirdly, Liabilities entails the current duty or responsibility to the stakeholders and shareholders. Liabilities will undertake and account for all the organization’s responsibilities and come up with better action items to address it as much as possible. Liabilities are necessarily being attended for the company to attend to liabilities to attain the future set goals.
Importance of classification of liabilities
Liabilities can be classified into both long-term and short-term. Long-term liabilities are those financial obligations of an organization that are due in a period more than a year. In a balance sheet, these liabilities appear after the short-term liabilities (Wild, Shaw & Chiappetta, 2015). Some examples of long-term liabilities include loans, debentures, and deferred tax liabilities. On the other hand, the liabilities are an entity’s financial obligation that is due within one year. Examples of these liabilities are accrued expenses, customer deposits, and tax payable, among others.
Liabilities should always consider the organization’s short-term and long-term plans as it looks at the continuous improvement of systems and applications. The modernization approach of an organization should be rooted based on the organization’s need to grow; hence, this includes the classified liabilities of the organization because this is where the budgeting and all other allocations of funds will be managed or controlled to some extent. Long-term and short-term plans set dimensions for what actions should be taken or executed in each period.
One vital importance of classifying liabilities into long-term and short-term is to enable the company to forecast future financial position. Classification helps in determining working capital to ascertain the excess of the short-term assets over current liabilities, which weigh on a company’s capability to attain its short-term objectives and helps in analyzing its cash flow. The current assets are useful for an organization to determine how assets can be converted into cash. Similarly, current liabilities aid in determining what the company will be paying out within a given year. In the absence of enough liquidity, one will not be able to meet the payment of his employees and buy inventory, which may bring the company to a halt. In conclusion, the classification of liabilities aids an organization in forecasting future benefits that it might receive from its assets.
References
Huian, M. C. (2012). Accounting for financial assets and financial liabilities according to IFRS 9. Annals of the Alexandru Ioan Cuza University-Economics, 59(1), 27-47.
Wild, J. J., Shaw, K. W., & Chiappetta, B. (2015). Fundamental accounting principles. McGraw-Hill Education.