Liabilities

In business terms Liabilities or a liability refers to something that is owed or is to be paid in the future, usually money or assets. This can be loans and debt or things like employee wages or the purchase of stock.

When doing accounting a business may have $1 million dollars in the bank, but due to its liabilities it may already have a lot of that put aside for paying wages, suppliers, loans and other outstanding debts.

Thus a business that appears to be in very good financial shape may actually have a lot of liabilities. This makes it a very important financial calculation to assess how financially stable a business really is. This is important for financial reporting, cash flow forecasting and when selling a business in an ethical manner.

Certain types of businesses are protected from their liabilities, whilst others have no protection at all. For example a sole trader is fully responsible for their liabilities and a court may seize any of their personal property, as well as business assets in order to cover its liabilities. A company may be "Limited Liability" meaning only their business related assets can be seized and any personal assets like their home can't be touched.

Liabilities don't just apply to businesses, but can also be applied to individuals that have loans, credit cards, store credit and so on. The same calculations can be applied. A financial lender may look at a person's liabilities before lending money or agreeing on the terms. It's just another factor that goes towards a person's financial stability and credit rating and somebody with a lot of liabilities is considered a risk to lenders.

In its simplest form liabilities are anything that is owed by somebody and is calculated by adding all of their outstanding debt together.