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What Is a Liability?

March 5, 2013

Liabilities cheat sheetWhen learning how to read and decipher financial statements you will need to differentiate between what is a liability and what is an asset. So what is liability? Liabilities are obligations, money or another asset or service that you owe to someone else. In personal finance this usually includes all the bills due plus any outstanding mortgages or credit. In business, liabilities also include accruals (which are cyclical bills such as payroll and taxes), credit, loans, and long-term debt (debt that will not be paid within a year). Current liabilities are due within one year. Total liabilities are the current liabilities plus long-term debt.

Liability is also a term used to mean what a person is responsible for. For example, when there is an accident your liability is the portion of the accident you are responsible for.

For more on the different types of liabilities and how they are defined, click here for a print-friendly, handy cheat sheet.

Adapted from Finance and Accounting for Nonfinancial Managers, Third Edition, by Eliot H. Sherman.

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