Monetary liability definition
/What is a Monetary Liability?
A monetary liability is a fixed obligation to pay. The amount of this obligation does not depend on the outcome of future events. The amount to be paid is typically stated in a contract, invoice, or employment agreement.
Characteristics of a Monetary Liability
The key characteristics of a monetary liability are as follows:
Obligation to pay a fixed or determinable amount. A monetary liability requires repayment in cash or an equivalent financial asset (e.g., accounts payable, loans). The amount is either fixed or can be precisely determined at a future date.
Recognized on the balance sheet. A monetary liability is reported as a liability on the balance sheet under either current or long-term liabilities.
Unaffected by inflation. The value of a monetary liability remains constant in nominal terms regardless of inflation or deflation.
Legally binding obligation. Monetary liabilities often arise from contracts, agreements, or legal obligations (e.g., loan agreements, vendor contracts).
Typically settled in cash. A monetary liability must be settled in money, checks, electronic transfers, or other cash equivalents.
Examples of Monetary Liability
Examples of monetary liabilities are as follows:
Trade payables. These are amounts billed to a company by its suppliers for goods delivered to or services consumed by the company in the ordinary course of business.
Notes payable. This is a written promissory note. Under this agreement, a borrower obtains a specific amount of money from a lender and promises to pay it back with interest over a predetermined time period.
Wages payable. This is hourly compensation earned by employees but not yet paid.
In every case, the amount of the obligation to be paid is clearly stated in, respectively, a supplier invoice, a loan agreement, and a payroll record.