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What is Liability

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Accounting Basics

What is Liability

What are the types of liabilities?

Liabilities are those which you pay in the future. Like I had bought some fancy equipment on a promise to pay in future for that equipment, so you pay for that equipment in future.

The definition which I mentioned above is much of an easy one but the real definition is

“Liabilities are present obligation as a result of a past event for which future economic benefit will outflow from your entity”

What is a present obligation?

It is your current duty to pay him because in the past you purchased something or have an activity which does lead to you to pay him in the future.

What is Economic Benefit?

It’s the benefit which is in money terms like you transfer the money or receive money in the future or present is an economic benefit which you will receive or pay.

There are two types of liabilities

  1. Current Liabilities
  2. Non-current liabilities

Non-Current liabilities:

These are those liabilities that you pay in more than 12 months like you pay for a loan after 3 years so that is your Non-current liabilities.

Current Liabilities:

These are those liabilities that you pay in less than 12 months, such as you promise your supplier to pay in 30 days that is your current liability.

There are many types of current liabilities:

  • Payables

It means you purchased the goods on credit and you agreed to pay in the future in exchange for those goods.

  • Bank Overdraft

It means you are taking a short-term loan from your bank and you will pay to the bank when the credit limit will expire it can be 30 to 60 days as it’s your liability.

  • Accrual

These are those expenses that are incurred but not yet paid, these are also your liability.

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