For the past two series, I have been focusing on the meaning of Assets and their Classes. In this article, we’ll discuss Liabilities.
What is a Liability?
Liability is a legal obligation of an individual or a business entity towards creditors arising out of some past or present transactions and events.
International Accounting Standards Board (IASB) probably provides the most accepted definition of LIABILITY:
“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.”
Essentially, liability refers to debts and obligations of the individual or business that represent as creditor’s claim on the person’s or business’ assets.
In Kiyosaki’s words, Liability is anything that takes money away from you.
It is the amount owned by an individual or a business at any time.
All borrowing or credit creates liability for the debtor and asset for the creditor or lender.
For instance, if you take a mortgage on your house for which you pay monthly interest to the bank OR if you live in your landlord’s house where you pay rent…..that house is a liability to you and an asset to your Landlord.
So many other properties we call assets like your car, your phone, etc are really liabilities..
You fuel and maintain your car regularly and you recharge and subscribe your phone too, thereby causing cash to flow away from you.
Other examples of liability include debt from friends, bank loan, mortgage, hire purchase, rent, deferred taxes, payroll and pension obligations, etc.
Liabilities could arise from borrowings which may be made to improve business or personal income and are paid back over an agreed period of an interval.
Both assets and liabilities are represented on the Balance Sheet of your account statement.
Due to our scope, I wouldn’t want to go into the intricacies of Accounting so I won’t scare you. 😁
However, it’s good that you know just the basics of these things that will add up your Financial Intelligence.
Next, we are going to consider the different types of liability and the relationship between Assets, Liabilities and Expenses.
Liabilities are not always bad. There are good debts and bad debts…. wanna know what this means?
More on this later on in the series.
Stick with us and watch out for the next series.
Any questions or suggestions? Use the comments box below.