All About Liabilities: Meaning, Types and Examples (2024)

A liability obliges a company to make a payment or provide a service. It is the counterpart of an asset. Here we show you what types of liabilities there are, how they are financed and why a company should always keep an eye on them.

Liability: Meaning

Liability refers to a financial obligation of a company. This means that it has to pay a debt to another company or a private person. A classic example is a bank loan that must be repaid to the bank in monthly instalments.

All About Liabilities: Meaning, Types and Examples (1)

What is a liability for one party is an asset for the other - and vice versa. If a company has to pay an invoice to its supplier, this invoice is a liability for the company but an asset for the supplier.

Liabilities can be divided into two categories according to their term or maturity: current and non-current, or short-term and long-term.

Liabilities are recorded on the right-hand side of the balance sheet. They are compared to assets, which represent the assets of the company.

All About Liabilities: Meaning, Types and Examples (2)

Assets vs. liabilities

The assets of a company are made up of various assets. These include the ownership of tangible assets, financial resources, and accounts receivable and inventory. They are thus the counterpart to liabilities, which include debts, mortgages, tax payments and account payables.

Types of liability & examples

As mentioned above, liabilities are divided into two different categories: current and non-current. Current liabilities have a short term or maturity (1 year or less). Non- current liabilities represent long-term obligations that have a maturity of more than one year.

Current liabilities

Current liabilities include:

  • Salary and wage payments to employees
  • Accounts payables (less than 1 year)
  • Loans with a term of less than one year (e.g. overdrafts) and monthly loan instalments
  • Dividends that a company must pay out to its investors
  • The provision of a service when an entity has received an advance payment for it

Ideally, a company pays all its current liabilities out of its current assets, i.e. out of the income it generates from its operations. If this is not the case, and it has to take out a loan to pay its current liabilities, for example, this may indicate that its business model is not profitable enough.

Non-current liabilities

The non-current liabilities include:

  • Warranty services that a company promises its customers
  • Expenses for events that may occur in the future, e.g. legal costs for court proceedings
  • Long-term loans with a maturity of more than one year
  • Payment of pensions to employees who retire at a later date

With regard to loans, it should be noted that a loan with a long term is counted as both a current and a non-current liability: The monthly loan instalments for the next 12 months are current liabilities; the remaining amount to be paid after this period is a non-current liability.

Example: A company has taken out a loan for £50,000. It has already paid off a sum of£10,000. For the next 12 months it has to pay instalments totalling £12,000. The£12,000 is therefore a current liability; the remaining £28,000 (£50,000 - £10,000 -£12,000) is a non-current liability.

Non-current liabilities are ideally financed on a long-term basis, i.e. from future revenues. Companies must therefore regularly review their current and non-current liabilities so that they can plan their financing.

Liabilities in accounting: Why is managing them so important?

A company must always be in a position to finance its liabilities. First of all, it must ensure the financing of current liabilities, i.e. generate sufficient revenues, since current liabilities should be financed from current assets.

Non-current liabilities sooner or later become current liabilities. Financing for them must be planned in advance. A company must therefore consider how it will finance its non-current liabilities in the long term.

In accounting, liabilities are compared with assets to see how the company is financed. If you subtract the assets from the liabilities, you get the equity of a company:

Equity = Assets - liabilities

This formula shows what would remain of the company's assets if all assets were liquidated and all liabilities were settled. Equity thus represents the book value of a company and is a direct indicator of how well a company is positioned financially.

All About Liabilities: Meaning, Types and Examples (2024)

FAQs

What is the meaning of liability and its types? ›

It defines liability as the bond between a wrongdoer and remedy for the wrong. There are two main types of liability: civil liability for private wrongs seeking damages, and criminal liability for societal wrongs punished through the legal system.

What is the meaning of liabilities and examples? ›

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.

What are 10 liabilities? ›

Accounts payable, notes payable, accrued expenses, long-term debt, deferred revenue, unearned revenue, contingent liabilities, lease obligations, pension liabilities, and income taxes payable are the ten types of liabilities in accounting that provide information about a company's financial obligations and ...

What is 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!

What are 4 characteristics of liability? ›

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.

What are the three major classification of liability? ›

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

What is a liability in your own words? ›

A liability is a debt or obligation or a personal flaw that stands in your way. A company's liabilities are simply the debts on its ledger, but a personal liability might be your extreme shyness in social situations. Depending on how you use it, the word liability has very different meanings.

What are my personal liabilities? ›

In personal finances, a liability is a debt you owe a lender, such as home mortgages, student loans, car loans and credit card debts. Some forms of liability can enable further financial goals.

Are liabilities debit or credit? ›

Assets and expenses have natural debit balances, while liabilities and revenues have natural credit balances.

What are everyday liabilities? ›

Liabilities for most households will include taxes due, bills that must be paid, rent or mortgage payments, loan interest, and principal due.

Do bills count as liabilities? ›

Your utility bill would be considered a short-term liability. Long-term liabilities are debts that will not be paid within a year's time. These can include notes payable and mortgages, although the portion that is due within the year should be classified as a short-term liability.

What are the five 5 most common current liabilities? ›

The most common current liabilities that appear on the balance sheet include accounts payable, short-term loans, salaries payable, taxes payable, accrued expenses, and deferred revenue.

What is liabilities in one word? ›

: something for which one is liable: as. a. : a financial obligation : debt.

What makes me a liability? ›

If you say that someone or something is a liability, you mean that they cause a lot of problems or embarrassment. As the president's prestige continues to fall, they're clearly beginning to consider him a liability. A company's or organization's liabilities are the sums of money which it owes.

What best describes liabilities? ›

Liabilities are economic obligations to creditors to be paid at some future date by the company.

What are the three most common types of liabilities? ›

Here is a list of some of the most common examples of current liabilities.
  • Accrued expenses. These are expenses that you have already incurred and need to account for. ...
  • Accounts payable. ...
  • Income taxes payable. ...
  • Interest payable. ...
  • Unearned revenue. ...
  • Short-term loans.
Nov 26, 2021

What is the legal definition of a liability? ›

To be liable in a legal sense simply means to be held legally responsible or obligated. For example, a defendant in a civil torts case may be liable to pay damages to the plaintiff if the court rules in favor of the plaintiff. [Last updated in June of 2023 by the Wex Definitions Team] COMMERCE. commercial activities.

What are the two types of liability provide an example for each type? ›

Current liabilities are short-term debts that you pay within a year. Types of current liabilities include employee wages, utilities, supplies, and invoices. Noncurrent liabilities, or long-term liabilities, are debts that are not due within a year. List your long-term liabilities separately on your balance sheet.

What are the different types of liability laws? ›

Types of Liability

The liability of licensees and their employees falls into three areas of law: criminal, administrative, and civil. One situation that could potentially result in all three types of liability is the sale of alcohol to a minor.

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