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What are Liabilities?

Definition: A liability is a responsibility on behalf of the entity to give up an economic benefit arising from past transactions or events.

An economic benefit comes in mainly two forms:

  • giving up an asset
  • providing a service

Where can Liabilities be found?

The Liabilities section can be found in the balance sheet, opposite the Asset section. This is because assets are recorded as debits, and liabilities are recorded as credits. They are listed in order of payment terms, from shortest to longest.

The Fundamental Accounting Equation

Liabilities are an integral part of the Fundamental Accounting Equation on which all accounting/bookkeeping is based on:
 

Assets = Liabilities + Owner's Equity

Liability Recognition

There are guidelines for the proper recognition of liabilities that differ among accounting standards in different countries. As an overall view, liabilities directly represent any creditor claims on the assets of the entity.

When recognised, liabilities are either considered to be short-term or long-term. The general time frame that separates these two distinctions is one year, but may be changed depending on the business.


Note that not all liabilities are enforceable through law, however in most businesses it is usually clear when an obligation arises.

 

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