Liability Definition & Meaning

A liability can be referred as a debt that a person or business owes to another party, typically in the form of money. Liabilities are cleared through time by exchanging economic benefits such as money, products, or services. Liabilities include deferred revenues, bonds, warranties, accounts payable, accumulated expenses, mortgages, and loans, which are all recorded on the right side of the balance sheet.

In summary, liability refers to an unfulfilled or unpaid duty between two parties. A financial liability is an obligation in accounting, but it is more characterized by past business transactions, service exchanges, assets, events or sales, or something that would offer economic advantage at a later point. Liability can also apply to a company’s or an individual’s legal duty. Several firms, for instance, purchase liability insurance in the event that a client or employee sues them for misconduct.

A liability is a company’s financial obligation that results in the company’s future economic gains being sacrificed to other individuals or companies. As a source of finance for a corporation, liability could be an alternative to equity. Additionally, some liabilities, like accounts payable and income taxes payable, are necessary components of day-to-day operations.

Based on their temporality, liabilities can be classified as current or non-current. Non-current liabilities are long-term while current liabilities are short-term. The due date is the main basis for classifying liabilities. This classification is essential for the company’s financial obligations to be properly managed.

Companies typically categorize their liabilities according to when they are due. Current liabilities have a one-year maturity and are frequently paid with the use of current assets. Debt repayments and deferred payments will appear on most organizations’ balance sheets because they are part of ongoing current and long-term operations.

Current Liability

Obligations that are due within a year can also be called current liabilities. These generally happen as a result of normal business operations. Because these financial obligations are short-term, they should be managed with the company’s liquidity in mind. The ratio of current assets to current liabilities is widely used to determine liquidity. The following are the most typical current liabilities: accrued expenses, accounts payable, interest payable, and income taxes payable.

Noncurrent Liability

Noncurrent liability can also be called long-term liability. Long-term liabilities may pertain to amounts generated from corporate operations as well as a source of finance. Understanding a business’ overall liquidity and capital structure requires a thorough understanding of its liabilities. Long-term liabilities include the following: notes payable, bond payable, and mortgage payable.

Contingent Liability

Contingent liabilities are a type of liability that is distinct from other types of liabilities. They are potential liabilities that may or may not develop based on the result of a future event that is undetermined. Only if both of the following criteria are met is a contingent liability acknowledged: the result is likely, or the liability amount can be assessed reasonably. A corporation does not record a contingent liability on the balance sheet if one of the conditions is not met. This item, however, should be disclosed in a footnote to the financial statements.