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In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events,the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.
A liability is defined by the following characteristics:
Liabilities in financial accounting need not be legally enforceable; but can be based on equitable obligations or constructive obligations. An equitable obligation is a duty based on ethical or moral considerations. A constructive obligation is an obligation that is implied by a set of circumstances in a particular situation, as opposed to a contractually based obligation.
The accounting equation relates assets, liabilities, and owner's equity:
The accounting equation is the mathematical structure of the balance sheet.
Probably the most accepted accounting definition of liability is the one used by the International Accounting Standards Board (IASB). The following is a quotation from IFRS Framework:
A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits— F.49(b)
Regulations as to the recognition of liabilities are different all over the world, but are roughly similar to those of the IASB.
Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an IOU.
Liabilities are debts and obligations of the business they represent as creditor's claim on business assets.
Liabilities are reported on a balance sheet and are usually divided into two categories:
Liabilities of uncertain value or timing are called provisions.
When a company deposits cash with a bank, the bank records a liability on its balance sheet, representing the obligation to repay the depositor, usually on demand. Simultaneously, in accordance with the double-entry principle, the bank records the cash, itself, as an asset. The company, on the other hand, upon depositing the cash with the bank, records a decrease in its cash and a corresponding increase in its bank deposits (an asset).
A debit either increases an asset or decreases a liability; a credit either decreases an asset or increases a liability. According to the principle of double-entry, every financial transaction corresponds to both a debit and a credit.
When cash is deposited in a bank, the bank is said to "debit" its cash account, on the asset side, and "credit" its deposits account, on the liabilities side. In this case, the bank is debiting an asset and crediting a liability, which means that both increase.
When cash is withdrawn from a bank, the opposite happens: the bank "credits" its cash account and "debits" its deposits account. In this case, the bank is crediting an asset and debiting a liability, which means that both decrease.
Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, including the single-entry and double-entry bookkeeping systems. While these may be viewed as "real" bookkeeping, any process for recording financial transactions is a bookkeeping process.
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company’s financial performance so that company financial statements are understandable and comparable across international boundaries. They are particularly relevant for companies with shares or securities listed on a public stock exchange.
In financial accounting, a balance sheet or statement of financial position or statement of financial condition is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as Government or not-for-profit entity. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.
Double-entry bookkeeping, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account. The double-entry has two equal and corresponding sides known as debit and credit. The left-hand side is debit and right-hand side is credit. In a normally debited account, such as an asset account or an expense account, a debit increases the total quantity of money or financial value, and a credit decreases the amount or value. On the other hand, for an account that is normally credited, such as a liability account or a revenue account, it is credits that increase the account's value and debits that decrease it. In double-entry bookkeeping, a transaction always affects at least two accounts, always includes at least one debit and one credit, and always has total debits and total credits that are equal. This is to keep the accounting equation (below) in balance. For example, if your business takes out a bank loan for $10,000, recording the transaction would require a debit of $10,000 to an asset account called "Cash", as well as a credit of $10,000 to a liability account called "Notes Payable".
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver.
In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be "tangible book value".
In double entry bookkeeping, debits and credits are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to a party associated with that account, and a credit entry represents a transfer from an associated party. For example, a tenant who pays rent to a landlord will make a debit entry in a rent expense account associated with the landlord, and the landlord will make a credit entry in a receivable account associated with the tenant. Every transaction produces both debit entries and credit entries for each party involved, where each party's total debits and total credits for the same transaction are equal. Continuing the example, the tenant will also credit the bank account from which they pay rent, and the landlord will debit the bank account where they deposit it.
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.
In bookkeeping, an account refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger pages, to which changes in value are chronologically recorded with debit and credit entries. These entries, referred to as postings, become part of a book of final entry or ledger. Examples of common financial accounts are sales, accounts receivable, mortgages, loans, PP&E, common stock, sales, services, wages and payroll.
Working capital is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets. Working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
A chart of accounts (COA) is a created list of the accounts used by an organization to define each class of items for which money or its equivalent is spent or received. It is used to organize the entity’s finances and segregate expenditures, revenue, assets and liabilities in order to give interested parties a better understanding of the entity’s financial health.
In financial accounting, "reserve" always has a credit balance and can refer to a part of shareholders' equity, a liability for estimated claims, or contra-asset for uncollectible accounts.
Flow of funds accounts are a system of interrelated balance sheets for a nation, calculated periodically. There are two types of balance sheets: those showing
In financial accounting, a provision is an account which records a present liability of an entity. The recording of the liability in the entity's balance sheet is matched to an appropriate expense account in the entity's income statement. The preceding is correct in IFRS. In U.S. GAAP, a provision is an expense. Thus, "Provision for Income Taxes" is an expense in U.S. GAAP but a liability in IFRS.
Asset and liability management is the practice of managing financial risks that arise due to mismatches between the assets and liabilities as part of an investment strategy in financial accounting.
A foreign exchange hedge is a method used by companies to eliminate or "hedge" their foreign exchange risk resulting from transactions in foreign currencies. This is done using either the cash flow hedge or the fair value method. The accounting rules for this are addressed by both the International Financial Reporting Standards (IFRS) and by the US Generally Accepted Accounting Principles as well as other national accounting standards.
In financial accounting, an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset. Simply stated, assets represent value of ownership that can be converted into cash. The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business.
A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.
This article lists some of the important requirements of International Financial Reporting Standards (IFRS).
A deposit account is a savings account, current account or any other type of bank account that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the bank and represents the amount owed by the bank to the customer. Some banks may charge a fee for this service, while others may pay the customer interest on the funds deposited.
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