Liability

Definition by the book

A liability is something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services. In general, a liability is an obligation between one party and another not yet completed or paid for. Liabilities are legally binding obligations that are payable to another person or entity.

A liability is increased in the accounting records with a credit and decreased with a debit. A liability can be considered a source of funds since an amount owed to a third party is essentially borrowed cash that can then be used to support the asset base of a business.

Liabilities are incurred in order to fund the ongoing activities of a business. Examples of liabilities are accounts payable, accrued expenses, wages payable, and taxes payable. These obligations are eventually settled through the transfer of cash or other assets to the other party. Liabilities expected to be settled within one year are classified as current liabilities on the balance sheet. All other liabilities are classified as long-term liabilities.

What it really means

Liabilities are responsibilities you owe and obligations you have to pay to another party. For examples, personal liabilities can be a house's mortgage or car loans. Business liabilities are money that a company owes its creditors. Liabilities are a crucial part of every business because they are used to grow the business and help pay for expansion.

They can also make transactions between businesses more efficient. For example, in most cases, if a wine supplier sells a case of wine to a restaurant, it does not demand payment when it delivers the goods. Rather, it invoices the restaurant for the purchase to streamline the dropoff and make paying easier for the restaurant. The outstanding money that the restaurant owes to its wine supplier is considered a liability. In contrast, the wine supplier considers the money it is owed to be an asset.

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