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Key concepts
Accountant · Bookkeeping · Trial balance · General ledger · Debits and credits · Cost of goods sold · Double-entry system · Standard practices · Cash and accrual basis · GAAP / IFRS
Financial statements
Balance sheet · Income statement · Cash flow statement · Equity · Retained earnings
Financial audit · GAAS · Internal audit · Sarbanes–Oxley Act · Big Four auditors
Fields of accounting
Cost · Financial · Forensic · Fund · Management · Tax

In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

  • All type of borrowing from persons or banks for improving a business or person income which is payable during short or long time.
  • They embody a duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services or other yielding of economic benefits, at a specified or determinable date, on occurrence of a specified event, or on demand;
  • The duty or responsibility obligates the entity leaving it little or no discretion to avoid it; and,
  • The transaction or event obligating the entity has already occurred.

Liabilities in financial accounting need not be legally enforceable; but can be based on equitable obligations or constructive obligations. An equitable obligation is a duty based on ethical or moral considerations. A constructive obligation is an obligation that can be inferred from a set of facts in a particular situation as opposed to a contractually based obligation.

The accounting equation relates assets, liabilities, and owner's equity:

Assets = Liabilities + Owner's Equity

The accounting equation is the mathematical structure of the balance sheet.

The Australian Accounting Research Foundation [1] defines liabilities as: "future sacrifice of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions and other past events."

Probably the most accepted accounting definition of liability is the one used by the International Accounting Standards Board (IASB). The following is a quotation from IFRS Framework:

A liability is 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


Regulations as to the recognition of liabilities are different all over the world, but are roughly similar to those of the IASB.

Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an IOU.

Liabilities are debts and obligations of the business they represent creditors claim on business assests. Example of Liabilities All kinds of payable 1) Notes payable - an written promise. 2) Accounts Payable - an oral promise. 3) Interests Payable. 4) Sales Payable.

Classification of accounting liabilities

Liabilities are reported on a balance sheet and are usually divided into two categories:

Liabilities of uncertain value or timing are called provisions - see Provision (accounting).

Bank account example

Money deposited with a bank becomes a liability of the bank, because the bank has an obligation to pay the depositor the money deposited; usually on demand. The money deposited is an asset for the depositor; but this asset will not be recorded by the bank because it is not the bank's asset.

A debit increases an asset; and a credit decreases an asset. A debit decreases a liability; and credit increases a liability.

When a bank receives a deposit it credits a liability account called "deposits" and credits the depositor's bank account for the same amount (the bank's "deposits" account is the sum of all of the amounts credited to all of its customer's individual bank accounts). A deposit received by a bank is credited because the bank's liability to its customer, the depositor, increases. When a bank informs its depositor that it has debited the depositor's bank account, it means that the depositor's bank account has been decreased by the amount debited.



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