Liabilities

DEFINITION of Liabilities

A  liabilities are the debts and obligations represented on its balance sheet. They are the opposite of assets.

WHAT IT IS IN ESSENCE

A liability is an obligation and it has to be part of a company’s balance sheet. A common example of a liability is accounts payable.

Accounts payable arise when a company purchases goods or services on credit from a supplier. When the company pays the supplier, the company’s accounts payable is reduced.

Liabilities are economic obligations that the entity is due to make to other entities. As a result of past transactions or other past events. The settlement of which may result in the transfer or use of assets, provision of services or another yielding of economic benefits in the future.

The form of the debt can vary but may include business expenses, loans, unearned revenues or legal obligations.

Liabilities detract from a company’s total value, as they represent debts that will have to be paid over time.

A liability has these following characteristics:

  • Any type of borrowing from persons or banks for improving a business or personal income that is payable during a short or long time;
  • A duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services, or other transaction yielding an economic benefit, at a specified or determinable date, on the occurrence of a specified event, or on demand;
  • A duty or responsibility that obligates the entity to another, leaving it little or no discretion to avoid settlement; and,
  • A transaction or event obligating the entity that has already occurred

HOW TO USE

Liabilities are a vital aspect of a company because they are useful to finance functioning and paying large growths.

Liabilities are often claims on a company’s assets

. However, liabilities can also be thought of as a source of a company’s assets.