Friday, November 4, 2016

What is a Liability?

a business man trapped in excess debt
Businessman trapped in excessive debt

Meaning and Definition:

What a business owes is a liability. It is a debt or obligation of an organization contracted during the course of business. In financial terms liabilities are a source funding assets. Liabilities have a credit balance in the books of accounts. Therefore, all credit balances appearing in the balance sheet are liabilities.

Those liabilities that need to be paid over a long period of time are long-term liabilities. Those repayable within a year are current liabilities.


Long-term Liabilities
Short-term (Current) Liabilities
Long Term Loans
Short-tern borrowings
Supplier Bills Payable
Taxes Payable
Preference Share Capital
Salaries and wages payable
Equity Share Capital
Short term provisions
Reserves and Surplus
Installments of term loans maturing within a year


We have already seen that liabilities are one of the sources of finance but excessive debt or liabilities is very dangerous for the business as inability to repay debts on time may cause insolvency or bankruptcy! Therefore many parameters like the debt-equity ratio, current ratio, quick ratio, and TOL/ TNW are used to closely monitor the liability levels of the business.

Further Reading:

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