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The three requirements that must be met for an item to be classified as a liability in accounting are:

1. Obligation or Duty 

A liability must represent a Bookkeeping and Accounting Services Jersey City or duty for the entity. This means the entity has little or no discretion to avoid the future sacrifice of economic benefits.

This obligation usually stems from a past transaction or event. For example, receiving goods on credit creates an obligation to pay for them, or borrowing money creates an obligation to repay the loan.

The duty can be legal (enforceable by law, like a loan agreement) or constructive (arising from the entity's past practices or established policies that create a valid expectation on the part of others, like a published warranty policy).

2. Unavoidable Future Sacrifice of Economic Benefits 

The entity must be required to settle the obligation by the probable future sacrifice of economic benefits. This future sacrifice usually involves the transfer or use of assets (like cash) or the provision of services.

This is the cost of satisfying the duty. For instance, the economic benefit is sacrificed when a company pays its accounts payable with cash or provides the service it was prepaid for.

The sacrifice must be probable—meaning it's more likely than not that the entity will have to transfer assets or provide services to extinguish the obligation.

3. Past Transaction or Event 

The obligation must have resulted from a past transaction or event. This is the key element that ensures only existing obligations are recognized as liabilities.

There must be an antecedent event that has already occurred, triggering the duty to act. For example, the liability for wages payable arises only after the employees have worked (the past event).

Future intentions or commitments alone are not sufficient. Simply planning to purchase inventory on credit in the Bookkeeping Services Jersey City a present liability; the liability arises only when the entity actually receives the inventory and the duty to pay is established.