What is Liability?
In accounting, “liability” refers to any type of financial obligation that a company must pay to another person or business at the end of an accounting period. Financial benefits, such as money, goods, or services,
Liabilities are recorded on the right side of the balance sheet and include various types of loans, creditors, lenders, and suppliers.
Both short-term and long-term liabilities are possible. Short-term liabilities are due within an accounting period (12 months), whereas long-term liabilities are due after a period of more than 12 months.
Liability/ies can be divided into three categories:
- Liabilities in the Present
- Non-current Obligations
- Variable Liabilities
Liabilities (money owed) aren’t always bad. Some loans are obtained to purchase new assets, such as tools or vehicles, that aid in the operation and growth of a small business.
However, too much liability can financially harm a small business. Debt-to-equity and debt-to-asset ratios should be tracked by owners. Simply put, a company should have enough assets (money-valued items) to pay off its debt. This article goes into greater detail and explains how to calculate these ratios.
How to Determine Liabilities
You can calculate your company’s liabilities in a variety of ways, but the most common is to simply add up the total amount owed on all existing short- and long-term debts.