Accounting Definitions - Exploring Liability Concept

Accounting definitions are important for those who is learning accounting and want to master theory and practice. These definitions provide understanding of the main accounting aspects and their practical application. This article will explore definition of liability.

Concept

Considering the definition of Liability we can that it is a debt owed by the business to the third parties, i.e. creditors. Referring to the basic accounting equation, where Assets=Liabilities+Equity, we can see that Liabilities is one of the sources with which the assets of the business are being financed. Liabilities are financial means which do not belong to the shareholders and which have a certain maturity date, i.e. must be returned back at the certain date.

Items Included

Depending on the maturity period, liabilities are divided into 2 groups:

• Current Liabilities - these are items which will be due within a period of one year or shorter. Examples can be note payable, accounts payable, salaries payable.
• Long-term Liabilities - these are items with the maturity date after one year, i.e. will have to repaid back within comparatively long time. Examples are long-term loans. Usually such liabilities are repaid back in certain parts, therefore part of long-term liabilities can be current, i.e. payable within one year and is included into the current group.

Balance Sheet must provide separate exact information on the above groups of liabilities in order to judge how much current debt business has and whether comparing to the current assets it will be able to pay this debt on time.

Referring to the accounting entries and accounts, Liability Account has a credit balance and when we account for a new debt, increase in it is reflected as a credit entry. When we account for the debt repaid back, we decrease balance of the corresponding liability account by debiting it.

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