Liability

The obligation of an element from past transactions whose settlement may require to transfer or use of assets is known as Liability. Liabilities may arise from equitable obligations or constructive obligations. Liability may be classified as current liability or long term liability. Current liabilities include wages, accounts, taxes and account payables which are expected to be liquidated in the near future. Long term liabilities may be bonds, leases and other warranties which do not get liquidated within a year and take few years. These liabilities are settled with transfer of economic benefits which may be money, goods or services. Liabilities may be legal or public. Legal liabilities oblige one to pay off debts. Public liability obliges one for civil wrongs.

Asset Liability Relation

Managing assets and liabilities in a perfect balance helps an institution to confront risks in a more positive attitude. So institutions like banks, finance companies and insurance companies deal with liabilities in this context. Striking the balance between asset and liabilities is a major step in making long term strategic plans.

Types of Liabilities

Fixed Liabilities, Long term Liabilities, Current Liabilities, Trade Liabilities, Financial Liabilities and Contingent Liabilities are different types of liabilities. Those liabilities such as capital, reserve and surplus which have to be paid during the dissolution of a firm are known as fixed liabilities. Those liabilities which are not payable within a year such as debentures and mortgage loans are known as long term liabilities. Immediate payments like sundry, creditors, bills payable and bank overdraft which have to be paid promptly are known as current liabilities. Liabilities from goods or services supplied in the business proceedings are known as trade liability. Liabilities for financial reasons are known as financial liabilities while a liability which is expected and is on the making such as bills discounted before maturity and case pending in a court for instance, are contingent liabilities.

Liabilities are covered with the help of liability insurance and the purchaser gets protected from the risks that may arise due to liabilities. The liabilities insurance helps to settle reasonable claims and deals with breach of any sort.

Individuals who have involved in the underwriting activities of professional liability have formed a forum known as ‘The Professional Liability Underwriting Society’ which is a nonprofit organization to help people who wish to make it big in the professional liability industry. The members of this society enrich their knowledge regarding professional liability by education and other activities.

Questions:

• What are the types of liabilities?
• What are fixed liabilities?