Liability

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This article considers liabilities as they exist in an entity from an accounting point of view.

In terms of accounting, liabilities are the financial obligations of a business. Examples of liabilities are moneys owed, debts, loans payable and accounts payable.

A promise to pay money or provide services in the future can be considered a liability. For example, when a company receives a shipment of, say, raw materials, it will record a liability to the vendor. If a product or service is paid for in advance, the seller will record a liability equal to the price of the product or service to be rendered in the future.

While many liabilities are known with precision, many others have to be accrued based on estimates. Insurance companies routinely estimate claims that will arise in the future from events that have already occurred. Most large companies make routine monthly estimates of costs for legal and outside accounting services, and accrue them during the year.

Liabilities can be classified as Current liabilities - debts payable within one year, or Long-term liabilities - debts payable over a longer period.

Examples of long term debt are bonds payable, and some long term notes. However, any portion of long term debt that is due within one year is shown separately as such on a balance sheet. Liabilities are part of the fundamental accounting equation: Assets - Liabilities = Net worth.

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