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What Is A Liability?

Liability refers to whatever is owed by an individual or organization, usually an amount of money.

It includes financial obligations to pay for loans, taxes, mortgage, bonds, and invoices for goods and services.

In the case of businesses, remuneration expenses, deferred bonuses, incentives, warranties, accrued fees, overhead costs, cost of training programs for staff members, and premium paid for ensuring the company’s assets are liabilities.

They are balanced out over time by the transfer of economic benefits, whether monetarily or otherwise.

Liabilities are usually recorded on the right-hand side of a balance sheet to be debited as legal or regulatory risks or obligations.

Current liabilities are short-term obligations that are due within one year or a standard operating cycle. In contrast, non-current liabilities are obligations that are due to be met in the long term, a period that is more than a year.

Deeper Definition

Generally speaking, a liability is an obligation between one party and another that is not yet completed or paid for. It is a state of being responsible for something, whether as an amount or a service owed.

The most common liabilities are usually the accounts payable and bonds payable, and they also double as the largest of them.

Liabilities are a crucial part of company and market operations and relations as they facilitate everyday transactions and possible expansion projects, increasing efficiency overall.

Liability can also be thought of from a legal standpoint, in which case the legal liability of an individual or business is brought into focus.

Several businesses make liability insurance provisions in case a customer or an employee sues them for negligence.

Assets are the direct opposites of liabilities. Assets refer to all that is owed to or owned by a company, including buildings, machinery, patents, interest owed, or intellectual property.

Subtraction of liabilities from assets gives the stockholder equity. (ASSET – LIABILITY = EQUITY)

Liabilities differ from expenses in that they are the cost of operation of a company. The net income of a company is calculated by subtracting revenue from expenses (REVENUE – EXPENSES = NET INCOME)

Liability Example

Suppose an individual skips payment for his water bill for several months, leading to the provider cutting off the supply. In that case, such an individual is expected to clear the debt (liability) to have water restored.

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