In finance, a liability is an obligation. This obligation legally binds you to another entity – either an individual or company for the means of settling a debt. When you hear that some is liable for a debt it means that they are responsible and obligated to pay that debt. One may also be liable for paying a debt or damages according to a settlement. The damages are usually due committing a wrongful act.
For example, if person A gets into a motor vehicle accident and hits person B in his or her car then person A is liable for the damages that were incurred due to the car accident. Person A must pay to have person B’s car replaced or have the damages repaired.
With companies, a liability is noted on the balance sheet and it can include accounts payable, taxes, wages, accrued expenses and deferred revenues. In the case of current liabilities, they are usually debts that are to be paid within one year. Long-term liabilities are debts that are to be paid over a longer period of time as settled upon between the two parties.
Liabilities in accounting do not need to be legally enforceable. But they can be based on equitable obligations or constructive obligations. Equitable obligations are duties based on moral or ethical considerations. However, a constructive obligation means an obligation that can be concluded from a series of facts related to a particular situation as opposed to an obligation tied to a contract.
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