Definition of Liability

Liability in general means something one is legally responsible of.

In business, liability can be defined as future outflow of money or economic benefits that the company is liable to make to the other entity as a result of past event or transaction. It is the business obligation or debt that arises during the business operations.

A general standard definition is

“A liability is a present obligation of a business or individual arising from the past event, the settlement of which is expected to take place sometime in future that would result in economic outflow of the company”

Brief Explanation of Liability

Liabilities are balance sheet items and includes the following

• Any type of loan or borrowing either from an individual or bank that needs to be paid back in a given point in time.
• Any service or duty that needs to be delivered in order to settle the previous debts, payment received or obligation.
• Payables of the company.

Liabilities are short term and long term.

• Short term liabilities are the one that needs to be settled within 12 months’ period. Short term liabilities are called current liabilities.
• Long term liabilities are the one that are due after and above 12 months.

Liabilities =Assets – Equity

Interest , salaries, accounts payables, Income taxes etc. are some examples of payables.