Which of the following statements is true regarding liability?

Liabilities represent present obligations of the entity, which is foundational in financial accounting. This means that liabilities arise from past transactions or events and create a duty for the entity to settle those obligations in the future, typically through the transfer of economic benefits like cash or services.

This definition aligns with the accounting framework, which distinguishes between current and non-current liabilities. Current liabilities are expected to be settled within one year, while non-current liabilities extend beyond that time frame. The emphasis here is on the obligation itself being present at the reporting date, rather than the timeline for settlement or the specific nature of the liabilities.

In contrast, the other options present inaccuracies. Liabilities do not represent future economic benefits controlled by an entity; instead, they relate to obligations. The statement that liabilities include only current obligations is misleading, as it excludes important long-term obligations. Finally, the assertion that liabilities are always long-term financial instruments contradicts the classification of current liabilities, which can include short-term debts and obligations due within a year. Hence, understanding the nature of liabilities as present obligations is critical for correctly interpreting financial statements and the financial position of an entity.