Now Let's Define Liability

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.

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 (apart from the bank) that you owe.

Suppliers (who you owe for products purchased on credit) would fall under creditors.

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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