Outline:
- Liabilities are things owed by a business;
- They can be both long and short term.
Liabilities are things the company is responsible for during the course of business.
Liabilities include things like loans, accounts payable and mortgages.
To settle a liability, a business must sell or hand over an economic benefit. An economic benefit can include cash, other company assets, or the fulfillment of a service
The main difference between assets and liabilities is that assets provide a future economic benefit, while liabilities present a future obligation.
Example
Let's say you want to start a coffee shop.
To do so, you get a loan from the bank to help pay for expenses. It is a ten year loan. Do you classify the liability as a short or long-term liability?
The answer is both. The reason why comes down to when you need to pay back the loan. It’s likely you need to pay a portion of the loan back quickly.
That is a current liability. Let’s say a current liability is a liability you have to pay back in a year or less.
The remainder of the loan or the part that is due over the next 9 years is not a current liability.
Liabilities: what else is included?
Long-term liabilities are also noted. One example is long-term debt. Amazon has issued bonds to help finance its operations which are long-term debt.
Some of Amazon’s bonds don’t mature until 2044.
The key take-away is businesses have obligations to repay their debts and that is a liability.
Summary
Liabilities are what a business has to pay to other parties.
There are both non-current and current liabilities. To settle liabilities, businesses must sell or hand over something of equal economic value.
