Liabilities Flashcards
(22 cards)
What is a liability?
Obligations requiring future sacrifice by paying assets or delivering a service.
What does payable mean?
Obligation to pay in the future.
What is the definition of a liability?
A company’s economic obligation or money/services the company owes to its creditors.
What types of obligations can be classified as liabilities?
Obligations can be legal, moral, social, or implied.
When are liabilities recognized in financial statements?
If they can be reasonably estimated and represent obligations to others from past transactions or events.
What is accounts payable?
An obligation to pay for goods bought on credit.
What are current liabilities?
Obligations to pay within a year.
What are examples of current liabilities? (6)
Accounts payable
wages
unpaid expenses
short term loans
portion of long term loans
unearned revenue.
What is unearned revenue?
Obligation to provide a paid-for service that hasn’t been received.
Example: Subscriptions - buy upfront and provide a service in the future.
What are long term liabilities?
Obligations not expected to pay within a year.
What are examples of long term liabilities?
Traditional loans, bonds, loans structured as leases, deferred income taxes, employee pension/healthcare costs, long term notes, mortgages, unearned revenue.
What is a long term note?
A borrowing contract between two parties.
What are contingent liabilities?
Potential obligations that may occur depending on the outcome of an uncertain future event.
What is a probable contingent liability?
Occurrence of an event creating a liability is probable, and the amount can be reasonably estimated.
What is a possible contingent liability?
More than remote but less than probable; disclosed in the footnote of financial statements.
What is a remote contingent liability?
No requirement for disclosure unless under a guarantee arrangement.
What is an estimated liability?
Definite obligation with only the amount in question, subject to estimation at balance sheet date.
What happens if no reasonable estimate can be made for a liability?
It is not recognized as a liability on the balance sheet.
What does ‘probable’ mean in terms of liabilities?
‘It will probably happen’ (You put it on the balance sheet).
What does ‘possible’ mean in terms of liabilities?
‘It might happen, but not sure’ (You mention it in the notes).
What does ‘remote’ mean in terms of liabilities?
‘It’s super unlikely’ (You don’t need to worry about it unless it’s a guarantee).
What does ‘estimated’ mean in terms of liabilities?
‘You know it will happen, just don’t know the amount yet’ (You talk about it but guess the amount).
