Liabilities
From ForcaWiki, the simple encyclopedia
| In one sentence | All the money a business is required to pay in the future, including loans, deferred pay, and bills. |
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| Category | Finance |
| Related | Asset, Debt, Equity, Deferral |
Imagine listing out everything you will owe money for by the end of the month: you promised to pay back a friend, you still owe your allowance jar for something you borrowed from it, and there is a small bill waiting to be paid. Add all of that up, and you have a list of your liabilities.
Liabilities are exactly this for a business: all the amounts it is required to pay in the future. That includes loans it has taken out, deferrals it owes to people who agreed to be paid later, and ordinary bills, like a credit card statement. Liabilities are the mirror image of assets, which are everything a business owns, rather than everything it owes.
Why the difference matters
Comparing a business's assets to its liabilities tells you what it is really worth. Whatever is left over once liabilities are subtracted from assets is called Equity, the true ownership value that belongs to the people who own the business.
Fun facts
- A business can own a lot of valuable assets and still be in real trouble if its liabilities are even bigger.
- Liabilities are not automatically a bad thing. Taking on debt to make a movie is completely normal, as long as the business has a solid plan to pay it back.
- Keeping a clear, honest list of liabilities is one of the most basic jobs of business accounting, since lenders and investors always want to see it before committing more money.