Searching for the definition of a Liability in Accounting? Here you’ll understand what a liability is in accounting, see examples of liabilities and understand how they are classified in the trial balance and balance sheet.
Updated 20 December 2021
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Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. What is a Liability?
A liability in accounting is defined as the people and organisations that a business owes money to for debts incurred in the course of trading. The liabilities of the business are shown on the balance sheet since they represent money that needs to be repaid rather than an expense that would appear in the profit and loss account (or income and expenditure statement).
2. Examples of Liabilities in Accounting
Here is a list of liabilities that commonly appear on the balance sheet:
- Trade creditors;
- Bank loans;
- Directors loan accounts;
- Unpaid corporation tax;
- Unpaid VAT;
- Or Unpaid PAYE;
3. Current Liabilities v. Long Term Liabilities
In accounting, liabilities fall into two categories: current liabilities (also referred to as ‘creditors falling due within one year’) and long term liabilities (also referred to as ‘creditors falling due after one year’).
As the name suggests, current liabilities are balances that need to be paid within one year of the balance sheet date, for example, trade creditors. Whereas long term liabilities are balances that need to be paid more than one year after the balance sheet date, for example, a 5 year bank loan or hire purchase agreement.
Where a liability, such as a bank loan, spans more than one year it will split between due within one year and after one year so that the reader can understand what portion is payable in the short-term v. the longer term.
4. Liabilities v Assets
An asset in accounting represents money owed to the business such as trade debtors, whereas liabilities represent the people and organisations that a business owes money to for debts.