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What is the liability?

We explain what the liability is, how this type of accounting obligations is classified and its relationship with the asset and equity.

  1. What is the liability?

Liabilities are understood, in financial accounting , to the obligations of a person or company, that is, to its debt with various types of creditors . The liability is then the opposite of the asset, which represents the financial assets and rights held by said person or company.

In that sense, the liabilities include all contractual commitments and debts, collected in promissory notes , payment commitments, consumptions pending settlement,  wages payable, taxes generated, etc. and all of them must be deducted from the net worth of the company or person , since they are capital outflows (investments or losses).

The liabilities of a company are part of the clarified information in a balance sheet (accounting balance), where they must be distinguished from the assets.

They are, together with equity, the possible sources of financing for a company, while liabilities are always a form of external or external financing  (indebtedness).

Therefore, the payment of liabilities is usually prioritized to acquire solvency, and often the record of them  of a company or of a person serves as a reference for its credit evaluation and other important financial procedures.

  1. Liability Classification

passive-economy
The liability payable is the total debts with short or long term dates.

The liability can be of several types:

  • Liability due . It covers the total of debts, documented or not, that the person or company has with third parties, the product of third-party financing. These liabilities involve short or long term obligations (categorized as short or long term liabilities, therefore), depending on the stipulated date of cancellation of the debt, that is, when the payment is required.
  • Liability not required . This concept would cover the total of the reserves and own funds of a company that cannot be available when belonging to the shareholders, but which cannot be demanded by them. However, many accountants disagree with the existence of this.
  • Contingent liabilities . An obligation arising from past events, which may or may not materialize in the future depending on certain conditions, and which may or may not become a specific obligation of payment.
  1. Relationship between assets, liabilities and equity

We already know that the assets and liabilities represent respectively the holdings and income and the debts and expenses of the accounting of a company or of any person. On the other hand, equity is the sum of the contributions of the owners , once discounted operating expenses and losses; that is to say, it is the total of what one has as social capital in a company, once the losses were discounted and the profits (or profits ) were added.

Said assets are thus composed of assets, which are the list of the different assets and liabilities to be taken into account.

Net Equity, then, is called the sources of own financing owned by a company or person, that is, the own resources available to them without third party financing (which generates a liability).

So that:

  • The asset is the set of assets owned, as well as their rights of use and transformation, capital, debts receivable. They are the destination (use) of the financial means and economic structure of the company.
  • Liabilities and equity are the sources of financing, external and internal, respectively, that are available to undertake a project. They are the source (origin) of the financial means, and make up the financial structure of the company.

Hence, the equity balance of a company is achieved by comparing or collating its  economic structure  (asset) and its  financial structure  (liability + equity). Also, the following numerically quantifiable relationships may occur:

  • Assets = Liabilities + Net Equity
  • Net Equity = Assets – Liabilities

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