Liability (financial accounting)

In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past 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.

A liability is defined by the following characteristics:

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 is implied by a set of circumstances in a particular situation, as opposed to a contractually based obligation.

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

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

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 as creditor's claim on business assets.

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

Liabilities of uncertain value or timing are called provisions.

When a company deposits cash with a bank, the bank records a liability on its balance sheet, representing the obligation to repay the depositor, usually . Simultaneously, in accordance with the double-entry principle, the bank records the cash, itself, as an asset. The company, on the other hand, upon depositing the cash with the bank, records a decrease in its cash and a corresponding increase in its bank deposits (an asset).

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