Instead, a service company sends an invoice for the services provided to make it easier for the oil company to make a payment at a later date. For example, if a company provides engineering services to oil companies for the extraction of oil, a liability doesn’t ask for payment to be made instantly. It also allows efficient transactions between businesses. Liability is an important aspect of business that finances large investments in order to keep the operations running. Liability includes accounts payable, mortgages, debentures, loans, accrued expenses, or deferred tax liability, etc. Long-term liabilities are settled over time by transferring economic benefits, such as goods, cash, or services. Current liabilities are usually due to be paid within a period of one accounting period whereas, long-term liabilities are due to be repaid over a period of more than one accounting period. There are long term liabilities and current liabilities. Liability is an obligation or a debt a business takes for the smooth running of its operations. They are different from each other because the components that fall under these two categories have different characteristics and features. But, this does not mean that expense and liability are the same thing. Expense and liability are the opposite they depict the outflow of cash in the current and future period. Income and asset represent the inflow of funds either in a current period or in a future period. Overall, there are four main categories under which the items of financial statement fall, i.e., income, expense, asset, and liabilities. Therefore, expenses and revenue make up a part of owner’s equity. The owner’s equity is derived from adding the investment made by the owners and the revenue earned by the business, and then, subtracting expenses and withdrawals from the total.
There are three basic elements of the accounting equation, i.e., assets, liabilities, and owner’s equity. The core of accountancy is the presentation of financial dealings in a structured way that makes it easily understandable for the reader.
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