A liability is understood to be the obligation on the part of an entrepreneur towards customers or suppliers. As a rule, such a liability exists in financial form, but other benefits are also possible. The opposite of the obligation is the so-called requirement.
What are the characteristics of a liability?
The essential feature of the liability is that the debtor , i.e. the entrepreneur, has not yet provided an agreed consideration for an already completed service by the customer or supplier, i.e. the obligee. If the consideration is provided at the same time as the service, for example paying with cash at the till, this is not a liability.
How does a liability arise?
The following is an example of how a liability can arise: On July 13, 2015, an entrepreneur orders products with a value of 1000 euros. These products are delivered immediately. However, the invoice is not paid until two weeks later. So there is a liability to the supplier for two weeks on the part of the entrepreneur.
The liability and the balance sheet
All liabilities that an entrepreneur has are listed as common items in the so-called double-entry bookkeeping, for which the balance sheet is used. So there is an item named “Liabilities” on the liabilities side of the balance sheet .
The structure looks like this:
- Trade payables: These are liabilities to customers and suppliers.
- Liabilities to credit institutions: These arise, for example, when credits or loans are taken out
- Receiving Down Payment on Orders: When a company receives a down payment for a customer’s order, it is a liability.
- Bonds: When a company issues bonds, it takes on liabilities.
- Liabilities to affiliated companies: These arise from business relationships such as exist between subsidiaries and parent companies
- Liabilities from accepting bills of exchange drawn and issuing own bills of exchange
- Liabilities to companies in a participation relationship: These are obligations to companies that have a proportionate stake in their own company
- Other liabilities: This includes all liabilities that do not fit into the other categories
The difference between a provision and a liability
According to usvsukenglish.com, an obligation always falls under “liabilities” if the time and amount are known. If this is not the case, liabilities are also referred to as provisions . These include, for example, pensions for which the payment date and the amount are not yet known.
What are provisions?
All liabilities whose existence, timing or amount cannot yet be defined with certainty are called provisions. Often, provisions are confused with reserves, which is something completely different. Reserves are not liabilities, but equity, i.e. financial reserves.
This is how provisions are made
In the case of liabilities, the due date, the amount and the reason are known. In the case of provisions, at least one of the parameters is not known. Nevertheless, provisions like liabilities are also debts of a company, which is why they are part of debt . It is logical that education reduces company profits.
The types of provisions in commercial law
Commercial law specifies exactly which provisions may be set up for which liabilities. For example:
School deferrals
The school return can be divided into
- Uncertain liabilities: These are all liabilities that are uncertain with regard to their due date, their amount and their occurrence.
- Provisions for impending losses: It is also permitted to set up provisions for impending losses.
Provisions and the balance sheet
In the balance sheet, provisions are clearly distinguished from ordinary liabilities. Nevertheless, both are outside capital and belong on the liabilities side of the balance sheet.
Double-entry bookkeeping
The double-entry bookkeeping was briefly discussed, in which, among other things, a balance sheet is formed. Therefore, in the following a few words on this topic: Double-entry bookkeeping is a system in commercial bookkeeping that involves the recording of business transactions in two ways. Hence the name of double entry bookkeeping. In the bookkeeping there is also the simple bookkeeping, but this is not about.
Double-entry bookkeeping obligation
In the Federal Republic of Germany, the HGB and the GoB must be observed here. The HGB obliges all merchants to keep double bookings and also commercial entrepreneurs who have an annual turnover of at least 600,000 euros or an annual profit of over 60,000 euros. The AO may also be observed here.
The basics of double entry bookkeeping
The basis of this type of bookkeeping is the balance sheet, which is why it is discussed in more detail at this point. It is always created at the beginning and later at the end of each financial year; it shows the financial situation of companies. There is an asset and a liability side in the balance sheet , the liability belongs on the liability side because it is outside capital. That has already been mentioned. The active side describes the use of assets, the liabilities side describes the origin of the assets.
The inventory accounts are the smallest unit of a balance sheet, which are also divided into an asset and a liability side; the naming and also the structure is often based on certain charts of accounts.
Liabilities also commonly include debts
In common parlance, the liabilities can also be referred to simply as debts. So it is about the fact that someone has not yet given someone else anything in return for a service. As already mentioned, this does not necessarily have to be a financial consideration. In the law of obligations, liabilities are referred to as the obligation that the debtor has towards a creditor. While the debtor has liabilities, the obligee also has claims in that he still gets something that he has not received before.
Conclusion: liability as a complex and far-reaching topic
The liability itself is explained very simply by definition, because it is nothing other than debt. However, if you take a closer look, there is a lot associated with a liability, especially when it comes to a company. In addition to liabilities, there are also provisions, and the two must be clearly distinguished from one another. The liabilities belong as a common item on the liabilities side of the balance sheet, which is why the balance sheet topic is an adjacent one when talking about liabilities. The opposite is the claim that a creditor has on the debtor. However, things are by no means complicated if you deal a little with the subject. And that is exactly what this article did.