Definition of liability accounts | Accounting glossary (2024)

FAQs

What is the definition of liabilities in accounting? ›

Liability is a term in accounting that is used to describe any kind of financial obligation that a business has to pay at the end of an accounting period to a person or a business. Liabilities are settled by transferring economic benefits such as money, goods or services.

A liability account is used to keep track of all legally-binding debts that must be paid to someone else.

Liabilities are what a business owes. It could be money, goods, or services. They are the opposite of assets, which are what a business owns. Businesses regularly owe money, goods, or services to another entity.

In business, known liabilities are expenses with prespecified dollar amounts that are recognized upfront, before the expenses occur. Explore the definition and types of known liabilities, including those created by agreement, contract, and law.

Liabilities can be described as an obligation between one party and another that has not yet been completed or paid for. They are settled over time through the transfer of economic benefits, including money, goods, or services.

Assets are quantifiable things — tangible or intangible — that add to your company's value. Liabilities are what your company owes to others, whether that's an investor or a bank that issued a loan. Equity is everything left when you subtract liabilities from assets, and it represents the owners' value in the company.

Liability accounts, a debit decreases the balance and a credit increases the balance. Equity accounts, a debit decreases the balance and a credit increases the balance.

Key Points. Some of the characteristics of a liability include: a form of borrowing, personal income that is payable, a responsibility to others settled through the transfer of assets, a duty obligated to another without avoiding settlement, and a past transaction that obligates the entity.

Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. An operating cycle, also referred to as the cash conversion cycle, is the time it takes a company to purchase inventory and convert it to cash from sales.

A liability (generally speaking) is something that is owed to somebody else. Liability can also mean a legal or regulatory risk or obligation. In accounting, companies book liabilities in opposition to assets.

What are liabilities for dummies? ›

In its simplest form, your balance sheet can be divided into two categories: assets and liabilities. Assets are the items your company owns that can provide future economic benefit. Liabilities are what you owe other parties. In short, assets put money in your pocket, and liabilities take money out!

Liabilities are the legal debts a company owes to third-party creditors. They can include accounts payable, notes payable and bank debt. All businesses must take on liabilities in order to operate and grow.

Liabilities are debts or obligations a person or company owes to someone else. For example, a liability can be as simple as an I.O.U. to a friend or as big as a multibillion dollar loan to purchase a tech company.

Liabilities are any debts your company has, whether it's bank loans, mortgages, unpaid bills, IOUs, or any other sum of money that you owe someone else. If you've promised to pay someone a sum of money in the future and haven't paid them yet, that's a liability.

Expert-Verified Answer

obligation is the act of binding oneself by a social, legal, or moral tie to someone while liability is the condition of being liable.

The property you purchase is a long-term asset that you can grow in value over the years you own it. The cost of the property is spread out over time instead of one year. On the other hand, the mortgage for the property is a liability in your books. The mortgage loan is a long-term debt you owe to a lender.

Liabilities can be classified into three categories: current, non-current and contingent.

The Boards' existing liability definitions include three criteria: (1) a present obligation; (2) a past transaction or event; and (3) a probable future sacrifice of economic benefits.