Liabilities are debts owed by a business to the outsiders due to previous purchases or borrowings. The liabilities will have to be settled by outflow of short or long term assets, i.e. anything that is of economic value.

There are three types of liabilities:

  • Short Term Liability: Any liability which can be repaid within a period of one year is known as short term liability. For example, sundry creditors, bank overdraft, etc.

  • Long Term Liability: Any liability which cannot be repaid within a year and balances are carried forward to the next financial year are known as long term liabilities. For example: Long term loans, debentures, etc.

  • Contingent Liability: Contingent liability is a potential liability which is dependent on future outcomes. For example, lawsuit expenses can be posted as contingent liabilities until the judgement is delivered as the status of the liability cannot be determined immediately.

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