📘 Meaning of Asset —
According to the ICAI Framework, an asset is:
“A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”
This definition highlights three essential elements: resource, control, and future benefits.
📝 Descriptive Breakdown
1️⃣ Asset is a Resource
An asset is anything that has value and can be used by the business to achieve its objectives. It may be tangible (like cash, building) or intangible (like goodwill, patents).
2️⃣ Controlled by the Enterprise
It is not enough to merely own something.
The business must have the right to use it, meaning it can:
• Use it in operations
• Earn income from it
• Restrict others from using it
3️⃣ Result of Past Events
The asset must have arisen from some past transaction or event, such as:
• Purchase
• Production
• Donation
• Credit sale
• Investment
It cannot be something the business only expects to own in future.
4️⃣ Expected Future Economic Benefits
Future benefits may come in different forms:
• Generation of revenue (ex: selling goods)
• Cost savings (ex: using own tools instead of renting)
• Enhancing production capacity (ex: machinery)
If it does not create future benefits, it is not an asset.
📦 Categories of Assets with Examples
📌Examples with Explanation
Controlled by business
Purchased in the past
Used for production for many years
➡️ Asset
Payment done now (past event)
Benefit (use of building) will be received in coming months
➡️ Prepaid Expense = Asset
Sale made earlier (past event)
Customer will pay money in future
➡️ Current Asset
Intangible but gives exclusive rights
Future income benefit
➡️ Intangible Asset
Liability — Meaning
Hey Readers! A deep concept explaination is given on liability as shown as under. Go through it.
📘 Liability — Meaning
Foundational definition as per ICAI
A liability represents the financial obligation of a business. It is the amount the business is required to pay to outsiders due to past transactions or events.
According to ICAI:
“A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.”
This definition has three essential components: present obligation, past events, and future outflow of resources.
🧠 Components of Liability
Three essential components of a liability
1️⃣ Present Obligation
A liability exists only when the business has a current responsibility to pay someone or settle a debt.
This obligation may arise from:
- Legal requirement (e.g., repayment of bank loan)
- Contractual requirement (e.g., paying suppliers)
- Constructive obligation (e.g., warranty claims based on company policy)
A present obligation means the business cannot avoid settlement without facing a penalty or loss.
2️⃣ Arising from Past Events
Every liability must be connected to a past transaction.
It is created when:
- Goods or services are received but not yet paid
- Money is borrowed
- Advance is received from customers
- Expenses are incurred but payment is pending
If there is no past event, no liability exists. Example: Planning to take a loan in future is not a liability until the loan is actually taken.
3️⃣ Resulting in Outflow of Resources
To settle a liability, the business must give up its resources in future.
These resources may include:
- Cash
- Goods
- Services
- Other economic resources
This expected sacrifice of resources is what makes liabilities important for financial reporting and financial health evaluation.
🧩 Why Liabilities Are Important
Descriptive insight for analysis and exams
Liabilities:
- Help measure financial obligations
- Show how much the business owes
- Affect liquidity, solvency, and financial risk
- Influence decisions of investors, lenders, and management
Thus, liabilities show how business operations are financed by external parties.
📦 Types of Liabilities
With descriptive explanations and logic
1️⃣ Current Liabilities (Short-Term Obligations)
These liabilities are required to be settled within:
- One year, or
- The operating cycle, whichever is longer.
Examples with explanation:
- Trade Payables / Creditors: Amount payable to suppliers for goods received.
- Bills Payable: Written promise to pay.
- Outstanding Expenses: Salaries, rent, wages due but not paid.
- Bank Overdraft: Bank allows negative balance, repayable shortly.
- Advance from Customers: Business must supply goods/services in future.
Why they are liabilities: Because the business must settle them soon, usually through cash or delivery of goods/services.
2️⃣ Non-Current Liabilities (Long-Term Obligations)
These are obligations that will be settled after one year.
Examples with explanation:
- Long-term Loans: Bank loans repayable over several years.
- Debentures: Borrowings from public/banks against fixed interest.
- Long-term Lease Obligations: Future payments under lease contracts.
- Deferred Tax Liabilities: Taxes to be paid in future due to temporary differences.
Why they are liabilities: Because the business is committed to paying them gradually over a long period.
3️⃣ Contingent Liabilities (Possible Obligations)
These arise from past events but their existence depends on a future uncertain event.
Examples:
- Court cases: Liability depends on the outcome.
- Guarantees given: Payment required only if the other party defaults.
- Bills discounted: Bank may recover amount if bill dishonours.
Why ICAI does not treat them as real liabilities:
Because they are not certain; they are only possible obligations.
They are not shown in the Balance Sheet but are disclosed in Notes to Accounts.
📌 Illustrative Examples
Link each situation to the type of liability
🔸 Example 1: Purchase of goods on credit for ₹30,000
- Goods are already received (past event)
- Business must pay supplier (present obligation)
- Future cash will go out
➡️ This is a Current Liability – Trade Payable
🔸 Example 2: Bank loan taken for 5 years
- Loan received earlier (past event)
- Business is bound to repay (present obligation)
- Payment will occur over many years
➡️ Non-Current Liability
🔸 Example 3: Unpaid electricity bill at year-end
- Electricity used already (past event)
- Bill must be paid (obligation)
- Resources (cash) will be lost in future
➡️ Outstanding Expense – Current Liability
🔸 Example 4: Customer pays ₹10,000 in advance
- Money received now
- Business must deliver goods/services later
- Obligations increase until delivery
➡️ Advance from Customer – Current Liability
🔸 Example 5: A court case is pending
- Amount payable depends on court decision
- Not certain
➡️ Contingent Liability – Disclosed in Notes