Liabilities Definition and Examples
Liabilities Definition – “The financial claims against a company’s resources, including accounts payable, loans and mortgages”.
In simple words, liabilities is the amount of money that a company owes to the outsiders. It is a legal binding to the enterprise. This means that, it is the responsibility of the firm to pay the certain amount of money to the entity or person whom it is borrowed. It appears on the Balance Sheet.
To get the clear picture of Liabilities Definition, let’s discuss an example – ABC Pvt. Ltd. is a furniture making enterprise. It purchase the wood of Rs 20,000 on credit from Ram & Sons. So, for ABC company is liable to pay Rs 20,000 to the seller. However, for the seller it is an asset which comes under debtors.
Types of Liabilities
Liabilities basically divides into 2 categories namely Long term liabilities and current liabilities.
Long term liabilities are the debts that are payable over a longer period of time. The duration to pay these debts is more than 1 year. For example – Mortgage, long term loans, etc. These obligations are paid off with the sale of assets.
Current Liabilities are those types of debts that are payable within the period of one year. For example – Overdraft, Outstanding expenses, Bills payable or accounts payable,etc. These liabilities are paid off with cash.
Contingent Liabilities are those debts that arises due to some sudden mis -happenings. For example – A court case is going on between XYZ and ABC company. Now, XYZ loses the case. The court asks to pay say Rs. 10,00 to the winning party. This kind of liability comes under contingent liabilities. It is an off- balance sheet item.
Importance of Liabilities
To understand the Liabilities definition, let’s have a look over why liabilities are important from business point of view.
- They are important for financing the day to day operations of the business. Firm’s buys raw materials on credit and continue its operation. The payment is made later.
- Very important for the expansion of business. However, cash is not always readily available. Here liabilities play an important role.
- Make transactions between two entities more efficient.
Related Financial Terms of Liabilities
- Accounts Payable Meaning – Accounts Payable Definition and Examples
- Current Ratio Meaning | Definition | Interpretation