What is Liability?

A liability is an obligation that a person or company has, typically involving a certain amount of money. Liabilities are resolved gradually by exchanging economic benefits such as money, goods, or services.

Liabilities, which are listed on the right side of the balance sheet, consist of loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.

Liabilities are what you owe or have borrowed, while assets are what you own or are owed.

How It Work?

Typically, a liability is an unfinished or unpaid obligation between two parties. In accounting, a financial liability is also an obligation, but it is specifically linked to past business transactions, events, sales, asset exchanges, or services that will bring economic benefits in the future. Current liabilities are usually short-term (expected to be resolved within 12 months or less), while non-current liabilities are long-term (lasting for more than 12 months).

Liabilities are divided into current and non-current based on when they are due. They may involve owing a service in the future (borrowing from banks, individuals, or other entities for short or long periods) or having an outstanding obligation from a past transaction. The main liabilities typically include accounts payable and bonds payable. These are commonly found on a company’s balance sheet, reflecting their continuous current and long-term activities.

Liabilities play a crucial role in a company as they provide funds for operations and facilitate significant expansions. They also enhance efficiency in business transactions. For instance, when a wine supplier sells a case of wine to a restaurant, they typically do not require immediate payment upon delivery. Instead, they send an invoice to the restaurant, simplifying the process and making it more convenient for the restaurant to pay.

The restaurant’s debt to the wine supplier is seen as a liability, while the wine supplier views the money owed to them as an asset.

Types of Liabilities

Businesses categorize their debts into two groups: current and long-term. Current debts are those that need to be paid within a year, while long-term debts are those that can be paid over a longer period of time. For instance, if a business takes out a mortgage that needs to be paid off in 15 years, that would be considered a long-term liability. However, the mortgage payments that are due within the current year are considered as the current portion of the long-term debt and are recorded in the short-term liabilities section of the balance sheet.

Liabilities vs. Assets

Assets are the possessions of a company, which can be either tangible or intangible. Tangible assets include buildings, machinery, and equipment, while intangible assets include accounts receivable, interest owed, patents, and intellectual property.

If a company deducts its debts from its possessions, the result is the equity of its owner or stockholders. This connection can be stated as:

Assets − Liabilities = Owner’s Equity

However, in the majority of situations, this accounting equation is typically shown like this:

Assets = Liabilities + Equity

Liabilities vs. Expenses

Expenses are the costs that a company pays to run its business and make money. They are different from assets and liabilities, and they are shown on a company’s income statement along with revenue. In simple terms, expenses are subtracted from revenue to calculate net income. The formula for net income is revenue minus expenses.


Liabilities play a crucial role in the financial world, offering both opportunities and risks. They can provide the necessary leverage for growth and operational flexibility, but they also require careful management to avoid financial pitfalls. Understanding the pros and cons of liabilities helps in making informed decisions that can lead to financial stability and success. Properly utilized, liabilities can be an effective component of a robust financial strategy.