What is A Liability?
A liability, in finance and accounting, refers to an obligation or debt that a company owes to external parties. Liabilities represent claims against a company’s assets by creditors and other parties, and they are classified based on their nature, timing, and terms of repayment. Liabilities are a key component of a company’s balance sheet and represent sources of funding or financing that must be repaid in the future.
Here are the primary types and characteristics of liabilities:
- Current Liabilities: Current liabilities are obligations that are due and payable within one year or the operating cycle of the business, whichever is longer. They include short-term debts, accounts payable, accrued expenses, taxes payable, and current portions of long-term debt. Current liabilities are typically settled using current assets such as cash, accounts receivable, and inventory.
- Long-Term Liabilities: Long-term liabilities are obligations that are due beyond one year or the operating cycle of the business. They include long-term loans, bonds payable, deferred tax liabilities, pension obligations, and lease liabilities. Long-term liabilities are not due for immediate repayment and are typically funded using future cash flows or assets.
- Accounts Payable: Accounts payable represent amounts owed by a company to suppliers or vendors for goods or services purchased on credit. Accounts payable are short-term liabilities that arise from the purchase of inventory, supplies, or other operating expenses. They are typically settled within a short period, often with trade credit terms.
- Notes Payable: Notes payable are formal written promises to pay a specified amount of money at a future date, often with specified interest rates and repayment terms. Notes payable may be short-term or long-term depending on the maturity date of the notes. They are used to finance business operations, capital expenditures, or other financing needs.
- Bonds Payable: Bonds payable are long-term debt securities issued by a company to raise capital from investors. Bonds payable have fixed interest rates, maturity dates, and repayment terms. Interest payments are made periodically until the maturity date, at which point the principal amount is repaid to bondholders.
- Deferred Revenue: Deferred revenue, also known as unearned revenue or deferred income, represents cash received from customers for goods or services that have not yet been provided or earned. Deferred revenue is a liability until the goods are delivered or the services are performed, at which point it is recognized as revenue.
- Contingent Liabilities: Contingent liabilities are potential obligations that may arise in the future, depending on the outcome of uncertain events such as lawsuits, legal claims, warranties, or guarantees. Contingent liabilities are disclosed in the footnotes to the financial statements but are not recognized as liabilities on the balance sheet unless they are probable and the amount can be reasonably estimated.
Liabilities represent the company’s obligations to creditors, suppliers, lenders, and other stakeholders, and they reflect the company’s financial obligations and leverage. Managing liabilities effectively involves balancing debt levels, repayment schedules, and interest costs to maintain liquidity, financial stability, and creditworthiness. Companies must carefully monitor their liabilities and ensure they have sufficient cash flow and resources to meet their repayment obligations and maintain solvency.
OTHER TERMS BEGINNING WITH "L"
- General Ledger
A general ledger is a fundamental accounting tool used to record and summarize financial transactions of a business or organization. It serves as a central repository for organizing and categorizing financial data in a systematic manner, providing a detailed record…
- Less-Than-Truckload (LTL) Carriers
Trucking companies that consolidate and transport less than a truckload of freight, utilizing a network of terminals and relay points.
- Letter of Comfort or Financial Capability Certification Program
This program provides ECapital's clients with a contingent financing commitment so that they can demonstrate to government contracting officers and large US corporations that they possess the financial wherewithal to execute on contract awards. This results in ECapital's clients being…
- Letter of Credit
A letter of credit (credit letter) is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the right amount. If the buyer is unable to make a payment on…
- Letter of Credit (L/C)
A Letter of Credit (L/C) is payment arrangement used typically in International Trade. The issuing bank guarantees that an exporter will receive payment in full as long as certain delivery conditions have been met. In a Standby Letter of Credit,…
- Leveraged Buyout
A Leveraged Buyout or LBO for short is when a company is purchased by typically a private equity firm using the purchased company's assets and cash flow to acquire a loan to buy the company. Many times the buyer will…
- LIBOR Rate
LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate that some of the world's leading banks charge each other for short-term loans. It stands for IntercontinentalExchange London Interbank Offered Rate and serves as the first step to calculating…
- Licensed Insolvency Trustee (LIT)
A Licensed Insolvency Trustee (LIT) is a professionally licensed and regulated individual who is authorized to provide assistance to individuals and businesses facing financial difficulties, including debt management, insolvency, and bankruptcy proceedings. LITs are governed by federal legislation and overseen…
- Line Credit Account
A line of credit is a revolving loan account which allows you to draw money when you need it from a bank or asset-based lender. Interest charges only occur once you borrow money but other fees many times are charged…
- Line of Credit (LOC)
A Line of Credit (LOC) is a credit facility provided to the government, business or individual by a financial institution or another commercial funder. The borrower can typically draw down on the account at any time, with a maximum limit…
- Line-haul Shipment
A shipment that transports between cities and over distances more than 150 miles.
- Liquid Asset
A liquid asset refers to an asset that can be quickly converted into cash without significantly affecting its market value. Liquid assets are easily tradable and readily accessible, making them valuable for covering immediate expenses, meeting short-term financial obligations, or…
- Liquidity
Liquidity denotes the ability or swiftness with which an asset or security can be turned into cash without altering its market value. The epitome of liquidity is cash itself. As a result, the presence of ready cash to enable such conversions plays…
- Load Tender
A term primarily used in the motor industry, load tender is an offer of cargo for transport by a shipper.
- Load Tendering
Provides a carrier with detailed information and negotiated pricing prior to scheduling pickup. This practice helps ensure contract compliance and facilitates automated payments.
- Loading Allowance
A reduction in rate that carriers offer to shippers and/or consignees who load and/or unload LTL or any quantity shipments.
- Loan Covenant
A loan covenant is a set of conditions or restrictions that a borrower must agree to in order to obtain a loan from a lender. These covenants are designed to protect the interests of the lender and ensure that the…
- Loan-to-Cost (LTC) Ratio
The loan-to-cost (LTC) ratio is a financial metric used to assess the alignment between the project's financing, typically in the form of a loan, and the actual construction costs. This ratio plays a pivotal role for both commercial real estate…
- Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio is a financial metric used by lenders to assess the risk associated with a loan, most often in the context of mortgage lending. It is calculated by dividing the loan amount by the appraised value of…
- Lock Box Payment Services
Lock Box Payment is a service provided by banks and finance companies to clients for the receipt of payment from customers (Account Debtors). Under the service, the payments made by customers are directed to a special post office box, rather…
- Logbook
A daily record interstate driver spends driving, off duty, sleeping in the berth or on duty.
- Long-Term Debt (LTD)
Long-Term Debt (LTD) are loans or other financial obligations that are being paid down over the span over more than one year. You will find long-term debt in the long term section of the Liabilities on a Balance Sheet.
- Low Boy (Heavy Equipment Hauler)
A lowboy trailer, also known as a low bed or heavy equipment hauler, is a specialized type of trailer used in the trucking industry to transport heavy and oversized equipment and machinery. Here are the key characteristics and features of…
- LTL Shipment
A less-than-truckload shipment. This truckload weighs less than the minimum weight a company needs to be eligible for a lower truckload rate.
- Lumping
When a driver assists in the loading and unloading of a trailers contents.