Liability

The boring, technical definition:

A liability is the future sacrifices of economic benefit that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets.

A liability is legally defined by the following characteristics:

- Any type of borrowing from persons or banks for improving a business or personal income that is payable during short or long time;

- A duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services, or other transaction yielding an economic benefit, at a specified or determinable date, on occurrence of a specified event, or on demand;

- A duty or responsibility that obligates the entity to another, leaving it little or no discretion to avoid settlement;

- A transaction or event obligating the entity that has already occurred.

Okay, the more Shmoopily fun version:

What is a liability? It's what you owe.

You bought 4 million gumballs on credit for your party pack for the parade. The money is owed to Gumballs 'R' Us in 90 days.

Short-term liability.

Next...you borrowed 83 million dollars to set up your new Dental Drive-thru service, due in 12 years at 7% interest a year.

Long-term liability.

Why long-term? Because it comes due in over a year.

And that’s basically it. Liability is one of the key elements of the balance sheet.