Finances, whether they are personal or business related, can be hard to understand and take in. The processes can be overwhelming, and even the financial language itself can be difficult to comprehend. When taking charge of your personal or business finances, you will want to know the meanings behind some of the funky lingo that your accountants and lawyers keep batting around. Liability is one such word. Below is a look at what liabilities are and how they function in the financial world.

Lia-Who?

So what is a liability, and how does it work? According to “Accounting Basics,” a chapter of Accounting for Windows defines a liability as the responsibility under the law of a business to pay a debt. This article states that companies can pay their liabilities with cash, goods or services, though often liabilities are paid with cash. There are two main types of liabilities: current liabilities and long term liabilities.

Current Liabilities

Current liabilities are those liabilities that the company needs to pay back in a relatively short time frame. This phrase refers to those liabilities that will most likely need to be paid with a business’ current assets. Current liabilities include Accounts

Payable, Notes Payable and Accrued Expenses

Accounts Payable is similar to bills that you are responsible for paying each month. For example, if your company uses UPS or Fed-Ex delivery companies, you are billed monthly for the transactions you make as opposed to being billed per each individual transaction. The business has an Account Payable to the delivery company. Notes Payable often refers to loans that have been taken from the bank that must be repaid in thirty days. Accrued Expenses are those expenses such as taxes, interest, and wages where the bills have not been received, but the balances of each must be paid.

Long-Term Liabilities

Long term liabilities are not due within a month’s time; in fact, they may not be due within a year. These include liabilities such as mortgages. Obviously, no one pays a mortgage off in a year, not even businesses.

Now that you have read this article, you have a better understanding of liabilities.