What Is a Liability?

A liability is something that 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. They're recorded on the right side of the balance sheet and include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.Liabilities are the opposite of assets. They refer to things that you owe or have borrowed. Assets are things that you own or are owed.

A liability is generally an obligation between one party and another that's not yet completed or paid. A financial liability is also an obligation in the world of accounting but it's defined more by previous business transactions, events, sales, exchange of assets or services, or anything that would provide economic benefit at a later date. Liabilities are categorized as current or non-current depending on their temporality. They can include a future service owed to others such as short- or long-term borrowing from banks, individuals, or other entities or a previous transaction that's created an unsettled obligation.

Current liabilities are usually considered short-term. They're expected to be concluded within 12 months or less. Non-current liabilities are long-term. They're expected to last 12 months or longer. The most common liabilities are usually the largest such as accounts payable and bonds payable. Most companies will have these two-line items on their balance sheets because they're part of ongoing current and long-term operations.

Liabilities are a vital aspect of a company because they're used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. A wine supplier typically doesn't demand payment when it sells a case of wine to a restaurant and delivers the goods. It invoices the restaurant for the purchase to streamline the drop-off and make paying easier for the restaurant. The outstanding money that the restaurant owes to its wine supplier is considered a liability. The wine supplier considers the money it is owed to be an asset.

Other Definitions of Liability;

Liability generally refers to the state of being responsible for something. The term can refer to any money or service owed to another party. Tax liability can refer to the property taxes that a homeowner owes to the municipal government or the income tax they owe to the federal government. A retailer has a sales tax liability on their books when they collect sales tax from a customer until they remit those funds to the county, city, or state. Liability can also refer to one's potential damages in a civil lawsuit. Liability may also refer to the legal liability of a business or individual. Many businesses take out liability insurance in case a customer or employee sues them for negligence. Source