A liability is a probable future sacrifice of economic benefit owed by one entity (debtor) to another entity (creditor) resulting from the receipt of an asset or service or the incurrence of an expense or loss for which settlement requires payment in money, goods or services. Liabilities that are due for settlement in the accounting period immediately following balance sheet date are generally reported as current liabilities, while those that come due later are reported as long-term liabilities.
Liability = Probable Future Sacrifice of Economic Value
Current liabilities are obligations that are due for settlement within 12 months from the balance sheet date or in the normal course of the entity’s operating cycle, whichever is longer. For settlement, they require the use of current assets or the creation of other current liabilities. Examples of current liabilities are accounts payable, notes payable, accrued liabilities, deferred revenue as well as the current portion of long-term debt.
| Current Liabilities in the Balance Sheet |
| Payables |
| Current Portion of Long-Term Debt |
| Accrued Liabilities |
| Deferred Income |
Long-term liabilities are a firm’s obligations that come due for payment after the following accounting period and settled in money, goods or services. Long-term liabilities are carried at their present value, which is the amount the company could pay to settle the debt at balance sheet date. Long-term liabilities typically include such obligations as long-term debt, finance lease obligations and deferred income tax liability.
| Long-Term Liabilities in the Balance Sheet |
| Long-Term Debt |
| Finance Lease Obligations |
| Deferred Income Tax Liability |
| Provisions and Contingent Liabilities |
| Pensions and Other Post-Employment Benefits |