Under what condition does a purchase order or contract create a liability?

A purchase order or contract creates a liability when goods or services are received because this is the point at which the obligation to pay for those goods or services is incurred. Until the goods or services are delivered, there is no enforceable obligation, even if a purchase order has been created.

Once the delivery occurs, the entity has received the benefit of the goods or services and, therefore, recognizes a liability for the payment due to the vendor. This aligns with the accounting principle of recognizing expenses and liabilities when they are incurred rather than when cash transactions take place.

Payment, while an important part of the process, does not create the liability; rather, it extinguishes it. Similarly, while budget approval is necessary for authorizing expenditures, it does not result in a liability until the actual receipt of goods or services occurs.