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

What is an Asset?

Slide showing various assets as an example

Meaning and Definition:

The dictionary meaning of the word ‘Asset; is a useful or valuable thing or person. In accounting parlance, however, person is kept outside the scope for the present, animals and plants are included though, and includes all things living or non-living, tangible or intangible, valuable rights and so on.

Another way defining is, what is owned is an asset and what is owed is a liability.

Assets are employed in the business either for a short time as stock-in-trade - that is meant for further sale, or for the long-term use for producing the goods and services.

In the double entry system of accounting, universally practiced, assets have a debit balance. Therefore all items appearing in the balance sheet and having a debit balance are assets.

Examples:

Tangible	Intangible	Living	Moving
Land	Bank Balance	Trees	Trucks
Buildings	Goodwill	Grass	Cars
Plant	Brand Value	Cattle	Ships
Machinery	Mining Right	Poultry	Aircraft
Cash	Software	Fish	Trains
Inventory	Receivables from customers	Horses	Motorcycles

Conclusion:

Assets are useful and valuable things, owned by the business and employed either for short-term as stock-in-trade or long-term as fixed assets.

Further Reading:

• Current Assets
• Fixed Assets
• Tangible Assets