The meaning and definition of liability (for the rest of us non-finance people)

Does your face go blank when your accountant or banker asks you about your liabilities?

“Liabilities” is a common accounting word and it’s important to know it’s basic meaning and definition. Why? It’s a basic part of running a business and for life in general (did you know your credit card debt was a liability?) so knowing what it means helps you become more financially savvy and hopefully, less stressed out.

To learn what liabilities means, you can watch the video below (2:33) or you can read on.

So…what does liability mean when it comes to accounting?

The definition of liability means something that you owe. It’s usually seen in a negative light because liabilities are something that drag down someone’s net worth. Let’s say you win the lottery and get $1 million in cash. But you owe others $500,000. Your net worth isn’t $1 million; it’s only half a million ($500,000).

A liability is the opposite of an asset, so when someone says “you’re an asset to this team, it means you bring up the team” like an MVP.

If someone says “you’re a liability to this team, it means you bring the value of the team down”.

In accounting, we use accounts to record financial information. One of the types of accounts is a liability account. These are amounts recorded to say that they are owed to others.

So, if you have a borrowings account where you record the receipt of $100,000 from a loan, you would record it on one side as cash.

And on the other, it would be a liability. It’s an IOU. You don’t own this money because you have to pay it back. That is a loan (because you own someone this money).

Another type of liability account is accounts payable.

It’s a common one where you buy something from someone and you promise to pay them back at a later time. Kind of like laybuy. If you want to learn about accounts payable in more detail, just check out my video on accounts payable here.

Another type of liability account is tax owing.

Depending on your business, sometimes you may have to pay tax every quarter (that’s every three months) to the government.

This tax owing may be recorded in the liability account so that you know how much is owing to the tax office so you can reserve some money aside to pay it.

So in a nutshell, a liability is something that is owed to someone else or some other entity. Just like an IOU.

Next: What’s Accounts Payable? (Easy Accounting Meaning & Definition)

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