Glossary › What is a liability?

A liability refers to your debts as a business. When it comes to basic business management and sound accounting, understanding your liabilities should be a chief concern.

What are liabilities in business?

Liabilities are a business’ legal debts or financial obligations that arise during the regular course of doing business.

Liabilities represent claims by creditors on the assets of a business and are essentially amounts owed to other businesses or individuals. Liabilities are a crucial aspect of financial analysis as they provide insights into the liquidity and overall financial health of a business.

How do you calculate liabilities in accounting?

Liabilities are recorded on a company’s balance sheet. They are a crucial component of the accounting equation. In small business accounting, you can discover your liabilities by using a simple calculation:

Assets = Liabilities + Equity

Examples of liability

Liabilities are the opposite of assets. They can refer to a range of debts or outgoings. Some of the more common liabilities for a business include:

• accounts payable
• bank loans
• wages owed
• taxes payable.

What are current liabilities?

Current liabilities are liabilities sitting on your balance sheet that are seen as short-term. If you have a debt payable (for example an unpaid invoice for supplies) within a year or a standard operating cycle, this is known as a current liability.

What are non-current liabilities?

Non-current liabilities, conversely, are long-term liabilities on your balance sheet that reference debts that won’t be paid for more than a year.

See related terms
What is an invoice?
What are fixed assets?
What is a balance sheet?