Question

Assume that your friend Will Morris, who is a music major, asks you to define and discuss the nature of liability. Assist him by preparing a definition of a liability and by explaining him what you believe are the elements or factors inherent in concept of a liability

Short answer

The business's liability means the expenses of the current year payable during any month of the next year and certain expenses also payable in the future in many years.

Step-by-step solution

Meaning of Liabilities

Liabilities are debts or obligations a business entity owes to another person or company. There are four types of liabilities. It includes interest payable on loan received, telephone expenses payable, electricity charges payable, dividend payable, salary payable to staff, and bank overdraft

Four types of liabilities are:

1) Currentliabilities:They are short-term liabilities payable within 12 months. Current liabilities include bills payable, outstanding expenses, bank overdrafts, etc.

2)Non-currentliabilities:These are liabilities payable in the long-term or maybe after 12 months. These liabilities are not to be paid within one year. It includes long-term loans, bonds, debentures payable, and pension benefits.

3) Contingent liabilities:This liability includes expenses that may be incurred or may not be incurred by the business. It reflects as a footnote on the balance sheet. An example of contingent liabilities is lawsuits proceeding and guarantees for loans.

4) Owners fund/capital and equity:It is an investment made as capital and equity capital in the business by a person or persons. It is the liability of the business and includes reserves and profits.