Liability

Definition

Liability is an obligation arising from past transactions that will require the transfer of assets or provision of services in the future. It represents a company's debts and financial responsibilities.

5 Must Know Facts For Your Next Test

1. Liabilities are listed on the balance sheet and are classified as either current or long-term.
2. Current liabilities are obligations that need to be settled within one year, such as accounts payable and short-term loans.
3. Long-term liabilities extend beyond one year, including bonds payable and long-term leases.
4. The relationship between assets, liabilities, and owner’s equity is represented by the accounting equation: Assets = Liabilities + Owner's Equity.
5. Liabilities affect both the balance sheet and the statement of cash flows by showing how much cash has been used to settle debts.

Review Questions

• What distinguishes current liabilities from long-term liabilities on a balance sheet?
• How do liabilities impact the accounting equation?
• Where would you find information about a company's total liabilities?

Related terms

Asset:

An economic resource that provides future benefit to a company, listed on the balance sheet.

Owner's Equity:

The residual interest in the assets of an entity after deducting liabilities, representing ownership value.

Accounts Payable:

A current liability representing amounts owed by a company to suppliers for purchases made on credit.