amount payable in dollars (e.g., accounts payable) or future services to be rendered (e.g., warranties payable). The party having the liability is referred to as the debtor. There are various types of liabilities. An actual liability actually exists and has a stated amount (e.g., bonds payable). An estimated liability also actually exists, but the amount has to be predicted (e.g., estimated tax liability). These liabilities are booked and are shown in the balance sheet as credit balances under current or noncurrent liabilities, depending upon whether they will be paid in a period of more or less than one year. A contingent liability is one that may or may not become due (e.g., notes receivable discounted; a pending lawsuit). A contingent liability is usually footnoted in the financial statement.
- General. A legally enforceable claim on the assets of a company, excluding owner’s equity, or the property of an individual, calling for a transfer of assets at a determined future date. Also, any item appearing on the right hand side of a double-entry accounting system or balance sheet.
- Banking. The funds owed by a bank, including time deposits and demand deposits, borrowings from a Federal Reserve Bank or other banks, and Federal Funds in the interbank market. Deposit liabilities, representing claims by a bank’s customers on the assets of the bank, are the major source of funds for bank lending. Other liability categories include managed liabilities or deposits that banks actively solicit from other banks; brokered deposits, which usually are certificates of deposit secured through a broker-dealer; and off-balance sheet liabilities which are liabilities that are not direct obligations on the issuing bank, but represent contingent obligations that may become payable in the future.
claim on the assets of a company or individual-excluding ownership equity. Characteristics: (1) It represents a transfer of assets or services at a specified or determinable date. (2) The firm or individual has little or no discretion to avoid the transfer. (3) The event causing the obligation has already occurred.
legal obligation to perform or not perform specified act(s). In insurance the concern is with the circumstance in which (1) one party’s property is damaged or destroyed, or (2) that party incurs bodily injury as the result of the negligent acts or omissions of another party. Liability insurance is designed to provide coverage for exposure on either a business or a personal basis.
In general: amount owed by an organization or individual, such as the amount owed by advertisers for space or time purchased.
Magazines: issues remaining to be served on all active subscriptions. As copies are served, the liability on those subscriptions is reduced and earned income increases at a value equal to the per-copy value of the issues served. Adjustments must be made to the liability amount if a subscription is canceled prior to expire or if a canceled subscription is reinstated.
a debt or financial obligation. Contrast with asset.
Example: One who borrows $75,000 for a mortgage loan incurs a liability to repay that loan.
Example: A general partner in a partnership has a personal liability for debts of the partnership in the event the partnership cannot repay its debt.
a potential loss.
Example: One should purchase sufficient liability insurance to protect against possible legal claims of someone who gets injured on one’s property.