Question

Hi,

Would anyone please answer the following question?

Thanks,

What is the importance of properly recording liabilities at the end of each accounting period? Include reference to the impact on the income statement and balance sheet.

Answer 1

Liabilities are the expenses which are paid after the services has been performed. When the services have been received but amount is not paid, such amount should be recorded as the liability as company owe this amount.

While recording the liability the expense account is debited whereas the Liabilities account is credited.

The liabilities of the company should always be properly recorded at the end of each accounting period as if the liability is not recorded then it will understate the income statement as the expenses is missed to be recorded and will overstate the Company`s retained earning as the liability is not recorded and vice-versa.

The examples of liabilities are Salaries Payable, Wages Payable, Telephone Expenses payable etc

The proper recording of the liabilities produces the true and financial view of the statements on which the stakeholders relies at the end of accounting period. Hence the failure to record the liabilities will not present the true and fair view of the statement.