What are the Main types of Liabilities?

There are three primary varieties of liabilities: current, non-current, and contingent liabilities. Liabilities room legal obligations or debtSenior and also Subordinated DebtIn order to understand an elderly and subordinated debt, us must very first review the resources stack. Resources stack ranks the priority of different sources the financing. Senior and subordinated debt describe their rank in a company"s capital stack. In the event of a liquidation, senior debt is paid out an initial owed to another person or company. In various other words, liabilities space future sacrifices of economic benefitsEconomic Value included (EVA)Economic Value included (EVA) mirrors that genuine value development occurs once projects earn rates of return above their price of capital and this increases value for shareholders. The Residual Income method that serves as an indicator that the benefit on the premise that genuine profitability occurs once wealth is the an entity is forced to make to other entities due to past occasions or past transactions.

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Defined by the worldwide Financial Reporting requirements (IFRS) Framework: “A liability is a existing obligation that the enterprise emerging from past events, the settlement of i beg your pardon is meant to result in an outflow from the enterprise of resources embodying financial benefits.”


Classification the Liabilities

These room the three key classifications of liabilities:

Current liabilities (short-term liabilities) room liabilities that are due and payable in ~ one year.Non-current legal responsibility (long-term liabilities) are liabilities that space due after a year or more.Contingent liabilities room liabilities that may or might not arise, relying on a certain event.

Types of Liabilities: current Liabilities

Current liabilities, likewise known as short-lived liabilities, room debts or duties that should be payment within a year. Existing liabilities must be carefully watched by monitoring to ensure that the agency possesses sufficient liquidity from current assetsCurrent AssetsCurrent assets are all assets that a company expects to convert to cash within one year. Lock are frequently used to measure the liquidity that a come guarantee the the debts or obligations can be met.

Examples of current liabilities:

Interest payableIncome taxes payableBills payableBank account overdraftsAccrued expensesShort-term loans

Current liabilities are used as a vital component in several short-term liquidity measures. Below are examples of metrics that monitoring teams and also investors look at at when performing jae won analysisof a company.

Examples of key ratios the use existing liabilities are:

The quick ratio: existing assets, minus inventory, divided by current liabilitiesThe cash ratio: Cash and cash equivalents split by existing liabilities

Types that Liabilities: Non-current Liabilities

Non-current liabilities, likewise known as long-term liabilities, are debts or duties due in over a year’s time. Irreversible liabilities are critical part that a company’s long-term financing. Suppliers take on permanent debt to gain immediate capital to money the acquisition of capital assets or invest in new capital projects.

Long-term liabilities are vital in identify a company’s long-term solvency. If carriers cannot repay their permanent liabilities as they come to be due, the company will confront a solvency crisis.

List of non-current liabilities:

Bonds payableLong-term note payableDeferred tax liabilitiesMortgage payableCapital leases

Types the Liabilities: random Liabilities

Contingent liabilitiesContingent LiabilityA contingent liability is a potential liability that may or may not occur. The relevance of a arbitrarily liability depends on the probability the the contingency coming to be an actual liability, that is timing, and also the accuracy through which the amount connected with it deserve to be estimated. Space liabilities that might occur, depending upon the outcome of a future event. Therefore, contingent liabilities space potential liabilities. Because that example, when a agency is encountering a lawsuit of $100,000, the agency would incur a liability if the sue proves successful.

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However, if the lawsuit is no successful, then no liability would certainly arise. In accountancy standards, a contingent liability is only recorded if the legal responsibility is probable (defined as more than 50% most likely to happen). The amount of the result liability have the right to be sensibly estimated.

Examples of arbitrarily liabilities:

LawsuitsProduct warranties

Other Resources

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