A liability is something that an individual or a legal entity owes, for example a payment for goods and services.
A liability is something you owe, while an asset is something that you own or are owed.
Common examples of liabilities are loans, wages that you owe employees, money that you owe suppliers—usually called accounts payable—or a mortgage.
Example of a liability
Let’s take two examples:
You run a clothing store and order a shipment of clothes. After you’ve received the clothes, you get an invoice from your supplier. The money you owe the supplier is considered a liability. It’s recorded in your bookkeeping as accounts payable. In this example, the money the supplier is owed is considered an asset by them.
If you’re a photographer who’s sent an invoice to an individual for Christmas card photos, the individual is liable to you, and you consider the money they owe you as an asset. This is also called accounts receivable in your bookkeeping.
These are just two examples. You can also be liable to a bank if you take out a loan. If your business owes corporate tax or consumption tax to the tax authorities, we can say that you have a tax liability.
Current liabilities and non-current liabilities
Liabilities are usually divided into current liabilities and non-current liabilities. Current liabilities are short-term liabilities that are due within a year. Non-current liabilities are liabilities that are not due for more than a year.
They can also be called short-term and long-term liabilities.
Liabilities should be included on your balance sheet, which is one of the financial statements included in your annual report. The balance sheet should show what your business owns and owes, so both assets and liabilities are included.
If you want help with your accounting, you should speak to an accountant.