Types of Obligations

Types of Obligations

There are mainly two types of liabilities.

Legal enforceable liability: when organization enters into agreement, then it constitutes a present obligation for the organization and it is treated as liability.

Constructive obligation: This type of obligation arises from business practice or policies of the organization.

How liabilities can be settled

1. Payment: liability can be settled by payment of cash

2. Transfer of asset: Liability can be settled by transfer of an asset

3. Service provision: Liability can be settled with replacing another liability

4. Conversion: liability can be converted into account.