What are Liabilities?

what-are-liabilities

A liability is an (existing) obligation towards another party. This obligation may consist of paying money, delivering goods or rendering services.

Liabilities can be divided into two categories: definitely determinable liabilities, for which the amount and timing are known (for example, notes payable and dividend payable). With estimated liabilities on the other hand, there is uncertainty about the amount and/or timing, which therefore need to be estimated. Examples of estimated liabilities – also called provisions – include income tax payable and warranty liability.

Liabilities can also be categorized based on their maturity. Current liabilities are obligations that are due within one year. Examples of current liabilities include accounts payable, wages payable and warranty liabilities. Long term liabilities (or, non-current liabilities) are due after one year or longer. Examples of long term liabilities include notes payable and long-term leases.


Liabilities Explained

Key points:

– a liability is an obligation towards another party (to pay money, deliver goods or render services)

– for definite determinable liabilities the amount and timing is known

– for estimated liabilities, there exists uncertainty in timing and/or amount

– current liabilities are due within 1 year

– long term liabilities are due after 1 year or longer

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