What Are Liabilities in Accounting? Explained with Easy Examples

Liabilities are amounts a business already owes because of past events and that will use cash or other value in future. 

Under IFRS, a liability is “a present obligation of the entity to transfer an economic resource as a result of past events,” and that idea shapes how standards treat payables, taxes, provisions, and lease balances.

Liabilities must be taken seriously. Cases exist where companies had to restate earlier financial statements just because debt was put in the wrong bucket between current and non-current, with regulators treating that as an accounting error that needs full correction.

In another recent example, fixing booking problems cut one large retailer’s reported net income by about 57% for the year, showing how liability and related entries can swing earnings on their own.

This guide explains the categories, measurement rules, disclosures, and quick controls that keep liability numbers clean and audit-ready throughout the year.

What is Liability?

There are three terms that define liability on a business:

• Present obligation. Something has already happened that binds you.
• Transfer of an economic resource. Usually cash, sometimes goods or services.
• Past events. A delivery, a signed contract, a tax period that has ended, or a service already received.

This definition is the same logic auditors apply when they test payables, taxes, and accruals.

Current, Non-current, and Provisions Explained

Financial statements split liabilities into current, non-current, and provisions, with separate note disclosures for contingent items.

A liability is current if it is due within twelve months. If you:

• Expect to settle it in your normal operating cycle, or
• Cannot delay payment for at least twelve months

Then it is a current liability. If it does not meet those points, it is a non-current liability. Provisions sit in the middle between normal bills that must be paid and uncertain risks. Record a provision when:

• There is already an obligation.
• Paying money is more likely than not.
• Putting a sensible number on that amount is possible.

Important Advice: If the obligation might happen but is less clear or measuring it is becoming tough, do not book a provision. Instead, show it as a contingent liability in the notes instead.

Easy Example To Understand Current vs Non-Current

• Supplier invoices due next month: current.
• Next year’s portion of a five-year bank loan: current; the rest: non-current.
• Payroll taxes payable for the last quarter: current.
• A decommissioning cost due in ten years with a legal requirement today: non-current provision (discounted).

Taxes That Become Liabilities

Payable VAT

Output VAT less input VAT creates a balance due to the tax authority. On UAE ledgers this appears as VAT liabilities UAE at period end until the return is filed and paid.

Corporate Income Tax

Current tax for the year becomes a current tax liability to the extent unpaid. That rule is explicit in IAS 12: unpaid current tax for current and prior periods is recognised as a liability. Deferred tax follows separate recognition rules.

Corporate Tax Liabilities UAE 

It will usually be current, because payment is due within months of year-end, while any uncertain positions follow the IAS 12 framework for recognition and measurement.

If all these liability terms feel confusing, Arnifi’s accounting and bookkeeping services in UAE can handle the day-to-day work.

Provisions and Contingent Liabilities Made Simple

Think of provisions as “probably payable, estimate known” and contingencies as “maybe payable, estimate unclear.” 

Recognise a provision for warranty claims, legal settlements that are likely, or restoration duties, and discount long-dated cash flows when the effect is material. 

If the outflow is only possible, disclose the facts and the uncertainties in the notes instead of booking a number.

Measurement Basics That Keep Numbers Clean

• Payables and accruals are measured at invoice amount or best estimate.
• Loans are measured at amortised cost using the effective interest method; disclosure covers interest rate and maturity.
• Provisions use the best estimate of the expenditure required; discount long-term obligations and unwind the discount as interest expense.

Frequent Mistakes and Easy Fixes

Mistake: Booking only the invoice. 

Expenses without invoices at month-end vanish from the balance sheet. Fix with standing accruals and reversal journals.

Mistake: Misclassifying maturities. 

The next-twelve-months test applies on the reporting date, not when the loan was signed. Update the split every quarter.

Mistake: Treating every uncertainty as a provision. 

Some risks are disclosures only. Use the “probable and measurable” test before booking a number.

Mistake: Ignoring advances from customers. 

Prepayments are contract liabilities, not revenue. Recognise revenue only after delivering.

Mistake: Parking long-dated obligations at face value. 

Material long-term provisions must be discounted. Track the unwinding as finance cost.

Conclusion

Remember the core rule to understand liability: present obligation, outflow expected, past event. This way, classifying most items correctly is possible. 

Use current versus non-current based on the twelve-month test, treat advances as contract liabilities, and keep provisions for obligations that are both probable and measurable. 

When in doubt, disclose and document. That approach keeps liabilities in accounting clean, notes useful, and passes audits. 

Arnifi offers accounting and bookkeeping services in UAE that turns liability rules into simple, daily practice. They track payables, loans, and provisions clearly, so you avoid surprises at month-end.