A liability is best described as a financial obligation or debt that an individual or organization owes to another party. It represents an amount that must be paid in the future and is usually linked to the acquisition of goods, services, or loans.
Liabilities are recorded on the balance sheet and can be classified into two main categories: current liabilities, which are due within one year, and long-term liabilities, which are due after one year. Examples of liabilities include loans, accounts payable, mortgages, and accrued expenses.
Understanding liabilities is crucial for assessing an entity’s financial health, as they impact cash flow and can indicate the level of risk associated with financial management.