Education Portal is now Study.com! Same great content, just under a new name. Learn more
Copyright

Liabilities in Accounting: Definition, Examples & Quiz

Instructor: Shawn Grimsley

Every business has liabilities. In this lesson, you'll learn what liabilities are and how they fit into the overall financial picture of a business, and you'll be provided some examples. You'll also have a chance to take a short quiz.

We also recommend watching The Balance Sheet: Purpose, Components & Format and What Is an Income Statement? - Purpose, Components & Format

Definition

Liabilities are financial obligations a business owes to other persons, businesses and governments. Short-term liabilities are financial obligations that become due within a year, while long-term liabilities are due in a year or longer. A company's total liabilities is the sum of its short-term and long-term liabilities. Liabilities are reported on a company's balance sheet along with its assets and owners' equity.

You should keep in mind that liabilities are financial obligations, not just debt. All debts are financial obligations, but not all financial obligations are debts. For example, let's say you lease a small retail space downtown and must pay rent on a monthly basis and not in arrears - in other words, May's rent is due on May 1, not June 1. Your rent obligation is a financial obligation, and therefore a liability, but it is not a debt because you pay for the use of the property for the month before you use it. If you don't pay your rent on time, it becomes a debt.

Liabilities and the Basic Accounting Equation

Liabilities is one of the three components of the basic accounting equation: Assets = Liabilities + Equity. Assets are the value of the property owned by a company, equity is the owner's capital in the company, and liabilities, as you know, are the financial obligations of the business. If you perform the relevant algebraic operation on the equation, you will come up with the formula for determining liabilities: Liabilities = Assets - Equity.

Examples

Let's look at some examples of liabilities. We'll break them down into long-term and short-term liabilities.

To unlock this lesson you must be a Study.com Member.
Create your account

Unlock Your Education

See for yourself why 10 million people use Study.com

Become a Study.com member and start learning now.
Become a Member

Already a member? Log In

Start Your Free Trial To Take This Quiz

As a member, you'll also get unlimited access to over 10,000 lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help you succeed.

Free 5-day trial
It only takes a few minutes to set up and you can cancel at any time.
Already registered? Login here for access

Earning College Credit

Did you know… We have over 100 college courses that prepare you to earn credit by exam that is accepted by over 2,900 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.