Liabilities are current obligations that an organization has to other parties based on past agreements. There are various characteristics of liabilities. The first is that obligations are based on past events. An organization must have entered into transactions in the past leading to the current obligation (Kieso, Weygandt & Warfield, 2019) . The second characteristic is the present responsibility or duty of an organization to commit its resources to meet the obligation when it is demanded or when a particular event occurs. The obligation is linked to a specific organization, and it cannot run away from fulfilling its duty.
There are two categories of liabilities, and these include current liabilities and long-term liabilities. Current liabilities are obligations that have to be fulfilled within one year. Examples of these liabilities include bank overdrafts, accrued expenses, interest payables, and accounts payable (Schroeder, Clark & Cathey, 2019) . Long-term liabilities are obligations that are payable over a long duration that exceeds one year. Examples of long-term liabilities include mortgage payable, bonds payable, leases on property and equipment, and deferred tax liabilities.
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It is essential to classify liabilities into these two categories since these obligations affect the cash flow of an organization. In the case of current liabilities, the organization must ensure there is sufficient cash flow from current assets, which will ensure that these payments can be made. Many organizations use these liabilities to meet short-term financial requirements, and making payments on time ensures that the firm can always access these services (Kieso, Weygandt & Warfield, 2019) . Long-term liabilities are used to buy capital assets, and these directly contribute to the cash flow of an organization. These liabilities help to determine whether a company is solvent in the long-term since firms that fail to meet these obligations experience solvency problems. Management should, therefore, ensure that there is sufficient cash flow to meet both its short term and long-term obligations.
References
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting . John Wiley & Sons.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial accounting theory and analysis: text and cases . John Wiley & Sons.
