Liability

A liability is an obligation to give up money or other resources in the future. For a person, common liabilities are mortgages, car loans, student loans and credit card debt. For a business, they include bank loans, amounts owed to suppliers, wages not yet paid and taxes due.

Liabilities are usually grouped by when they must be paid. Current liabilities are due within about a year, such as supplier bills and the next twelve months of loan repayments. Non-current liabilities are due later, such as the remaining years of a mortgage or a long-term bond.

Liabilities are not always bad. Borrowing to buy a home or to expand a profitable business can make sense if the asset gained is worth more than the cost of the debt. The danger comes when liabilities grow faster than the income needed to repay them.

Liabilities are subtracted from assets to find what truly belongs to the owner. If a business has assets of 500,000 and liabilities of 320,000, the owners' equity is 180,000.