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Liability Definition

What Is Liability?

Liability is a broad term for the state of being responsible for or in debt. Liabilities are found in the law and accounting. Someone can be subject to monetary or legal liability.

Key Takeaways

  • Liabilities are debts or responsibilities owed between people or companies.
  • Liabilities may also mean legal risks.
  • Businesses can help protect themselves from liability with insurance and a smart business structure.
  • In accounting, a liability is money that a company owes. A company's accountant lists liabilities on its balance sheet.

Understanding Liability

In general, a liability is a debt or responsibility. People also sometimes call legal risks liabilities. Professionals and business owners should understand that there are many types of liability.

Common examples of liabilities:

These are only a few of many types of liability. A good insurance policy can help to guard against these unexpected expenses.

Business owners may also choose to create a limited liability company (LLC) or corporation. This can help to protect the business owners from the business's liabilities. There can also be tax benefits to these structures.

Additionally, individuals can be liable to each other. This includes criminal and civil liability. One of the most common types of liabilities between people is car accident liability, which is why most states make it a legal obligation for drivers to carry automobile insurance.

Liability in Accounting

In accounting, a liability is any money that a company owes. Companies record their liabilities and their assets on their balance sheets.

Current assets include things like accounts receivable, cash, and inventory. Fixed assets include buildings, machinery, and land. The total sum of a company's liabilities and shareholders' equity must equal the total assets. That equation, called the Accounting Equation, can also be reversed. So, the shareholders' equity must equal the total assets minus the total liabilities.

Accounting liabilities fall into a few categories:

  • Expenses that get paid off within a year are called short-term liabilities. These include things like utility bills. Accounts payable that are due within the year are also considered short-term or current liabilities.
  • Expenses that will not get paid off within a year are long-term debts or long-term liabilities. Long-term liabilities may also be called non-current liabilities. These might include mortgages or some income tax expenses.
  • Contingent liabilities are expenses that might not actually have to be paid. These include warranties, gift certificates, product recalls, and lawsuits. If the expense is likely and possible to estimate, the accountant must list it on a company's balance sheet.

Liability is an important concept in both accounting and the law. The term is used in a few different ways, but it always generally refers to a debt or responsibility.

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