In accounting, a liability represents an obligation that a business entity or an individual owes to outsiders. Liabilities can come in various forms, such as loans taken, money owed to suppliers (accounts payable), or requirements to deliver goods or services as part of a contract. Liabilities are reported on the balance sheet and are typically classified as either current liabilities—obligations expected to be settled within one operating cycle or a year—or non-current liabilities, which are longer-term obligations.
For example, if a business borrows $10,000 to purchase equipment, the $10,000 borrowed represents a liability that the business is obligated to repay. Similarly, unpaid wages to employees for the work they already performed are considered liabilities. Properly managing liabilities is crucial for maintaining the financial health of an organization.