What is liability?

Liability is defined as a present obligation of an entity arising from past events the settlement of which is expected to result in an outflow of resources that embody economic benefits.A liability is an obligation that already exist. an obligation may be legally enforceable as result of binding contract or statutory requirement, such as a legal obligation to pay a supplier for goods purchased.


Obligation may also arise from normal business practices, or a desire to maintain good customer relations or the desire to act in fair way. For example, an entity might undertake to rectify faulty goods for customers, even if these are now outside their warranty period. This undertaking create obligation, even though it is not legally enforceable by customer of the entity.
A liability arises out of past transaction or event. for example, a trade payable arise out of past purchase of goods or services, and an obligation to repay the bank loans arises out of past borrowing.
The settlement of liability should result in an outflow of resources that embody economic benefits. This usually involve the payment of cash or transfer of other assets. A liability is measured by the value of these resources that will be paid or transferred.
Some liabilities can be measured only with substantial amount of estimation. these liability are called provision. read more

What is meant by expenses in accounting?

What is meant by expenses in accounting?

Expenses are cost incurred to purchase and pay for items such as labour, raw materials which are used in normal course of transaction. Expenses include:


  • Expenses arising in normal course of activities, such as the cost of sales and other operating costs, including the depreciation of non current assets. Expenses result in outflow of assets (such as cash and finished goods inventory) or the depletion of assets (for example the depreciation on non current assets)
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    What is meant by going concern basis?

    Going concern basis means that financial statements are prepared on the assumption that the entity will continue to operate for the foreseeable future, and does not intend to go into nor will be forced into liquidation. In other words going concern basis means that the business operate as if it will be there in the coming years therefore there is no expectation of going out of business.


    The going concern basis of accounting is that all the items of value owned by a business, such as inventory and property, plant and equipment, should be valued on the assumption that the business will continue in operation for the foreseeable future. The business will not close down or be forced to close down and sell of all the items (assets). This assumption affects the value of assets and liabilities of an entity as reported in the financial statements.
    If the business entity is not a going concern, and is about to be closed down and liquidated, the value of its assets would be their estimated value in the liquidation process. Also if the entity cease to be going concern the categorization of assets in the statement of financial position also change as all assets and liabilities becomes current.  read more

    What is meant by materiality in accounting?

    Materiality is the amount of transaction or balance and the type of information in the financial information which can affect the decision of the user of financial statements if that amount is omitted or misstated.


    In other words the information in the financial statement is material if committing it or misstating it could influence decision that users make on the basis of financial information about the specific reporting entity.
    An error which is too trivial to affect the user’s understanding of financial statement is referred to as immaterial.
    There is no absolute measure of materiality that can be applied to all businesses. In other words there is no rule that say any item greater than  5% of profit must be material. Whether an item is material or not depend on its magnitude or its nature or both in context of specific circumstance of the business. read more