What Is a Liability in Accounting?
Definition, current and long-term liabilities, and a worked example.
Home › Accounting Glossary › Liability
| Topic | Financial accounting · Balance sheet |
|---|---|
| Normal balance | Credit |
| Formula | Liabilities = Assets − Equity |
Liability in plain English
A liability is a debt or obligation. Current liabilities are due within a year, such as supplier invoices, short-term loans, accrued expenses and customer deposits. Non-current liabilities are due later, such as long-term bank loans.
Worked example
A shop buys inventory worth 3,000 on credit from a supplier. The shop now owes 3,000.
| Account | Debit | Credit |
|---|---|---|
| Inventory | 3,000 | |
| Accounts payable | 3,000 |
- Calling the owner’s capital a liability. It is equity.
- Forgetting expenses that are incurred but not yet paid. They are accrued liabilities.
Frequently asked questions
Is accounts payable a liability?
Yes. It is money owed to suppliers and is usually a current liability.
Are liabilities always bad?
No. Borrowing can fund growth. What matters is whether the business can comfortably meet its obligations.
What is the difference between a liability and an expense?
A liability is something owed at a point in time and appears on the balance sheet. An expense is a cost for a period and appears on the income statement. An unpaid expense creates a liability.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.