What are Liabilities?
Liabilities represent the obligations or debts owed by an individual, organization or business to external parties. They are the negative aspects of an entity’s financial position, reflecting its legal or financial obligations. Liabilities can include loans, mortgages, accounts payable, accrued expenses, bonds, and other financial obligations.
Features of Liabilities:
- Legal Obligation: Liabilities arise from legal or contractual obligations, where the entity is obligated to make future payments, deliver goods or services, or meet other financial commitments.
- Amount Owed: Liabilities represent the amount owed to external parties, such as lenders, suppliers, employees, or government entities. The amounts can be definite (e.g., specific loan amount) or estimated (e.g., provision for future liabilities).
- Repayment or Settlement: Liabilities typically have a specified repayment or settlement schedule, including due dates, interest rates, and terms of payment. They may be short-term (due within one year) or long-term (due beyond one year).
Difference between Assets and Liabilities
Assets and Liabilities are fundamental concepts in accounting and finance that help in assessing the financial health and position of an individual, organisation, or business. Assets are resources owned by a company that have future economic value, such as cash, inventory, or property. Liabilities are obligations a company owes to others, such as loans or accounts payable.