Liability
What is a liability?
Broadly, a liability is anything that puts an individual or entity at a disadvantage. However, in financial accounting a liability is more narrowly defined as an “obligation arising from past transactions or events.”
A financial liability may result in the transfer of assets or other services in the future from the liable entity. A financial liability for a corporate entity includes bills for office supplies, for instance, that would be found in accounts payable.
The most commonly used definition of a financial liability comes from the International Accounting Standards Board (IASB): “A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.”
What is the formula for financial liabilities?
In balance sheet accounting:
Liabilities = Assets – Owner’s Equity
What are the two types of accounting liabilities?
- Current liability: obligations that are expected to be paid within one year. Includes business obligations such as wages, taxes and accounts payable.
- Long-term liability: obligations that are not expected to be paid within one year. Includes business obligations such as long-term bonds, pension obligations and long-term leases.