Characteristics of Liability

Characteristics of Liability

1.    Present Obligations

Liability is a present obligation of the organization arising from the past event. For example entity has purchase goods on credit, it is liability because this is present obligation of the organization arises from the past event, but a plan to purchase in next year does not give rise to a liability because it is future event.

2.    Settlement

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

3.    Measurement

Some liabilities are measured with accuracy i.e. payable; however, some liabilities cannot be measured with ultimate accuracy, rather calculated by making a reasonable estimated i.e. provision for bad debt or provision of warranty.

4.    Provision as liability

Provision is liabilities because they arise from the event which has already taken place, for example provision for bad debt and warranty arises due to the sales which have already taken place. If there were no sales there would be no provision.