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Liability

A liability is a financial obligation or debt that a company or individual is legally responsible for paying. Liabilities can be short-term, such as accounts payable or payroll obligations, or long-term, such as loans, bonds, or mortgages. On a company’s balance sheet, liabilities represent the claims creditors have on the company’s assets. Managing liabilities effectively is crucial for maintaining financial health and solvency.

Example

A company’s liabilities include a $500,000 bank loan and $100,000 in accounts payable, which must be repaid within specific time frames.

Key points

• A financial obligation or debt that a company or individual is legally responsible for.

• Liabilities can be short-term (e.g., accounts payable) or long-term (e.g., loans).

• Represents the claims creditors have on a company’s assets.

Quick Answers to Curious Questions

Liabilities include loans, bonds, accounts payable, and payroll obligations that the company must repay.

Excessive liabilities can strain a company’s cash flow and increase the risk of insolvency if they cannot be repaid.

Short-term liabilities are due within one year, while long-term liabilities extend beyond one year and often include loans and bonds.

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