Characteristics of Liability

Characteristics of Liability

Characteristics of liability may be expressed in term of present obligation of past event, settlement of liability, and recognition etc. These characteristics have been briefly explained below

    Important Characteristics of Liability

Following are the important characteristics of liability.

1.   Obligation of Past Event

Liability is a present obligation of a past event.  Thus a future event cannot give rise to a liability. This concept has been explained with an example , Goods purchased on credit give rise to a liability, because this is a present obligation of a past event, however future plan of purchases goods does not create liability, because there is no present obligation for a past event.

2.   Settlement of Liability

A liability can be settled in many ways like payment of cash , transfer of other asset, providing a service, replacement of liability , convert liability into equity i.e. share issue, liability can also be settled by writing of the liability i.e. writing of bad debts. 

3.   Recognition of Liability

Two important conditions need to be satisfied for liability recognition.

a.    An items fulfills the liability definition criteria.

b.    Amount of liability can be measured reliably.

4.   Current & Non Current Liabilities

Liabilities can be broadly classified into current & non current liabilities. Current liability is to be settled within one year like creditor, while non current liabilities are to be settled after one year like long term loan etc. The concept of current & non current liabilities have been explained in more details in my other article.

List of important Characteristics of liability

1.    Liability is present obligation of past event.

2.    Liability required future economic flow for settlement.

3.    Liability must be able to measure reliably.