What Is a Liability?

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What is a liability?

A liability is anything that a business owes to another party.

This can be in the form of money, goods, or services.

A liability is typically shown on a company's balance sheet and is classified as either short-term or long-term.

In this blog post, we will take a closer look at liabilities and how they are shown on a company's balance sheet.

Where is a Liability Shown in a Company Financial Reports?

A liability is any debt that your business has incurred.

All of these debts a business has are show up as liabilities on your company's balance sheet.

The balance sheet, forms one of the 3 key financial statements for a business. The other 2 key statements being the profit and loss account and the cash flow statement. 

Liabilities are grouped and classified as either long term or short term liabilities. 

Short term liabilities are also often referred to as current liabilities. 


What is the Difference Between Long Term and Short Term Liabilities?

Long-term liabilities are debts that are not due for more than one year.

An example of this would be a mortgage that has been taken out to buy commercial premises.

On the other hand, short-term liabilities are debts that are due to be paid within one year.

An example of this would be an overdraft that needs to be repaid within 12 months.

If you have debt where some is payable within the next 12 months, and some is payable over a longer period (say a Bounce Back Loan) then the portion that is repayable in the next 12 months will be shown as a short term liability and the portion that is payable over 12 months will be shown in long term liabilities. 

In conclusion, it is important to understand what liabilities are and how they can impact your business financials.

By knowing where to find them on your balance sheet and understanding the difference between long-term and short-term liabilities, you can make informed decisions about which debts need to be prioritised.

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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.