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 exists. an obligation may be legally enforceable as a result of a binding contract or statutory requirement, such as a legal obligation to pay a supplier for goods purchased.
The obligation may also arise from normal business practices, or a desire to maintain good customer relations or the desire to act in a fairway. For example, an entity might undertake to rectify faulty goods for customers, even if these are now outside their warranty period. This undertaking creates an obligation, even though it is not legally enforceable by the customer of the entity.
Liability arises out of past transactions or events. For example, a trade payable arise out of the 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 involves 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 a substantial amount of estimation. This liability are called provision.