Liability
A financial obligation or debt owed by an individual or business to another party.
What is Liability?
A liability is a present obligation of an entity arising from past events, the settlement of which is expected to result in an outflow of economic resources. Liabilities appear on the right side of a balance sheet and include current liabilities (accounts payable, short-term debt, accrued expenses — due within one year) and non-current liabilities (long-term debt, deferred taxes, pension obligations — due beyond one year). The relationship between liabilities and equity forms the foundation of financial leverage analysis.
Example
Ford Motor Company carries substantial liabilities, including approximately $120 billion in automotive debt and financial services obligations. These liabilities represent money owed to banks, bondholders, suppliers, and customers. Ford's interest coverage ratio shows whether its operating income is sufficient to service the interest on these liabilities.