Liabilities

Definition

Liabilities are financial obligations a company owes to outside parties, including debts and other forms of credit. They represent claims against the company's assets and must be settled over time through the transfer of economic benefits like money, goods, or services.

5 Must Know Facts For Your Next Test

1. Liabilities are classified into current liabilities (due within one year) and long-term liabilities (due in more than one year).
2. Accounts payable and short-term loans are common examples of current liabilities.
3. Bonds payable and mortgage loans are typical examples of long-term liabilities.
4. The balance sheet lists liabilities in order of their due date, with current liabilities first followed by long-term liabilities.
5. Total liabilities alongside total equity provide insights into a company's financial leverage and capital structure.

Review Questions

• What is the difference between current and long-term liabilities?
• How are accounts payable categorized on the balance sheet?
• Why is it important to distinguish between different types of liabilities?

Related terms

Assets: Resources owned by a company that have economic value and can provide future benefits.

Equity: The residual interest in the assets of an entity after deducting liabilities; often referred to as shareholders' equity.

Balance Sheet: A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.