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A liability is officially defined as:
A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
In other words, a liability is simply...
A debt of the business.
YOU --------------------> OWE --------------------> BANK
The debt will result in assets (usually cash) leaving the business in the future.
The most common liability is a loan.
Another common liability is called creditors.
A creditor, also known as a payable, is any business or person that you owe (apart from a loan).
Suppliers (who you owe for products purchased on credit) would fall under creditors.
Other examples of creditors are the telephone company that you owe or a printing shop you owe for printing fliers. Even the tax authorities could be considered a creditor if you owe them.
When you pay a loan back, or you pay off your creditors, some of your assets (most often cash) will leave your business.
In our next lesson we're going to define the third element of the basic accounting equation, owners equity.
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Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)
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Who or what is a Supplier? Q: I don't understand the meaning of supplier... who is a supplier?
A: A supplier is a business or individual that supplies your business (you) with …
Why is the Provision for Doubtful Debts a Liability? Q: Why is the provision for doubtful debts a liability?
A: A provision is a loss or expense that will definitely occur in the future, but we don't …
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