Liability Definition And Meaning

Settlement of a liability can be accomplished through the transfer of money, goods, or services. A liability is increased in the accounting records with a credit and decreased with a debit. A liability can be considered a source of funds, since an amount owed to a third party is essentially borrowed cash that can then be used to support the asset base of a business. Examples of liabilities are accounts payable, accrued liabilities, deferred revenue, interest payable, notes payable, taxes payable, and wages payable.

Liability Definition And Meaning

Companies can face the potential for future liabilities if they are in litigation or if they have issued product or service warranties that would need to be honored in the future. The other two types of contingent liabilities — possible and remote — do not need to be stated in the balance sheet because they are less likely to occur and much harder to estimate. Accountants should note possible contingent liabilities in the footnotes of the company’s financial statements, though. A business’s assets may consist of buildings, machinery, equipment, patents, intellectual property, accounts receivable, and any interest owed to the business.

What are Liabilities?

Definition and synonyms of liability from the online English dictionary from Macmillan Education. A defect of title or undisclosed liability would invalidate the sale at any time. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in. Since his injury, Jones has become more of a liability than an asset to the team. The new law would double airlines’ liability for lost luggage to $2,500.

  • For example, if the company wins the case and doesn’t need to pay any money, it does not need to cover the debt.
  • The equation to calculate net income is revenues minus expenses.
  • Assets and liabilities are two parts that make up a company’s finances.
  • If one of the conditions is not satisfied, a company does not report a contingent liability on the balance sheet.
  • If you are pre-paid for performing work or a service, the work owed may also be construed as a liability.
  • Expenses represent monetary obligations that have already been paid.

GAAPin the U.S. or the Russian Accounting Principles in Russia. Although the recognition and reporting of the liabilities comply with different accounting standards, the main principles are close to the IFRS. Liabilities are settled by transferring money, goods, services, or other economic benefits. This is the British English definition of liability.View American English definition of liability.

Non-Current (Long-Term) Liabilities

A contingent liability is a potential liability that will only be confirmed as a liability when an uncertain event has been resolved at some point in the future. Only record a contingent liability if it is probable that the liability will occur, and if you can reasonably estimate its amount. Depending on the timeline specifics, you may record deferred credits as non-current or current liabilities. These credits refer to revenue a business collects before recording the earnings on the income statement. Examples of this are customer advances, deferred revenue, or transactions where the business owes credit but it is not yet revenue. Once the business earns the revenue, it can reduce this line item by the amount earned.

What are 5 examples of liabilities?

  • Bank debt.
  • Mortgage debt.
  • Money owed to suppliers (accounts payable)
  • Wages owed.
  • Taxes owed.

Long-term debt, also known as bonds payable, is usually the largest liability and at the top of the list. Long-term or non-current liabilities are those that need to be paid in one year or longer. Financial analysts and accountants want to ensure that a company can handle its long-term liabilities with assets from future earnings or financing transactions. Liabilities for a business may be long-term loans for funding operations, money a company owes to vendors or suppliers, and leases on warehouse space. If a company has an obligation to pay someone or for something, it is a liability. Accounts payableor income taxes payable, are essential parts of day-to-day business operations.


Accounting processes often involve examining the relationships between liabilities, assets, and equity and how these things affect a business’s profitability and performance. If one of the conditions is not satisfied, a company does not report a contingent liability on the balance sheet. However, it should disclose this item in a footnote Liability Definition And Meaning on the financial statements. Equity In finance, the equity definition is the amount of money the owner of an asset would have… Balance Sheet In accounting, the balance sheet definition refers to the financial statement that reports the… AP typically carries the largest balances, as they encompass the day-to-day operations.

A release of liability is an agreement between two parties that acts as a legal waiver in the event something goes wrong during an activity. One party agrees not to hold the other party legally responsible for potential injuries or damage. A liability is an obligation –like money, goods, or services– that you owe another party. A liability is the opposite of an asset, which is something you own, or another party owes you. If a company’s product requires repairs or replacement, the company needs the funds available to honor the warranty agreement.

What is Qualitative Research? Methods and Examples

Of the preceding liabilities, accounts payable and notes payable tend to be the largest. Businesses should break down their liabilities on their balance sheet based on the timeline of their due dates. Current ones are due within one year and are typically paid for with current assets.

  • The transfer of property will not incur a liability to inheritance tax.
  • For public companies, liabilities represent a key item on the balance sheet that is subtracted from a company’s assets to determine its net worth to investors.
  • Referring again to the AT&T example, there are more items than your garden variety company that may list one or two items.
  • Although the recognition and reporting of the liabilities comply with different accounting standards, the main principles are close to the IFRS.
  • Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years.
  • Liabilities often have the word « payable » in the account title.