Liability Slide

Businessman Trapped in Excess Liabilities and Debt

What is a Liability?

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.

Examples:

Long-term Liabilities	Short-term (Current) Liabilities
Long Term Loans	Short-tern borrowings
Debentures	Supplier Bills Payable
Bonds	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

Significance:

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:

• What is an Asset?
• Current Liabilities
• Current Assets
• Current Ratio
• Debt Equity Ratio
• TOL/ TNW Ratio