What Is Liability in Accounting Terms?

The general definition of a liability often refers to a hindrance or disadvantage. However, it can also mean a responsibility, which is how it is viewed in accounting terms. The acquisition of assets becomes an accounting liability and a part of a company's assets. Growth of a business also results in liabilities.

Most financial institutions use some form of the International Account Standards Board (IASB) definition which states: “A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.”

Examples of Accounting Liabilities

• Payroll or wages to employees
• Credit given to customers
• Accounts payable or credit given to the business by other vendors
• Pension plans
• Product warranties

What does each of these items have in common? In order to build assets, a business obligates to pay out money in specific ways. This owed money represents the liability of the company. Each liability has a monetary value that the company must repay. Companies set up repeating cycles of liabilities in its normal functioning.

Example of Liability in Accounting

We can look at a simple example of a car loan to explain this principle. To buy a car, most people need a loan from either a bank or a car dealership. The person buying the car now has an asset. The loan is the liability, and the bank or the dealership expects repayment of this loan. This example shows the cyclical nature of acquiring assets in that they often require more money to purchase than many people or businesses have on hand.