| In the most general sense, a liability is anything that is a hinderance, or puts one at a disadvantage.
In accounting
- In accounting, a financial liability is something that is owed to
another party. This is typically contrasted with an asset which is something of value
that you own. The basic accounting equation relates assets, liability, and capital (or equity) thus:
- liabilities + equity = assets
where assets are what you own, liabilities are what you owe to others, and equity is what you have contributed to the
venture.
Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an IOU.
In law
- In law a legal liability is a term used to describe situations in which a person
is liable, for, say, damage to property
and is therefore responsible to pay compensation for any damage
incurred; liability may be civil or criminal.
- In commercial law, limited liability is a form of business ownership in which business owners are legally responsible for no
more than the amount that they have contributed to a venture. If for example, a business goes bankrupt an owner with limited liability will not lose unrelated assets such as a personal residence (assuming
they do not give personal guarantees). For an explanation see business
entity.
An example (from both accounting and law)
Money that you have accumulated is an asset to you. It is something of value that you own. If you take your money to a bank
and deposit it there, it becomes a liability to the bank (the bank owes you the money). The money is both an asset to you and a
liability to the bank.
Alternatively if, when you take the money to the bank, you store it in a safety deposit box rather than deposit it into an
account, the bank has a legal liability (under bailment law) to ensure that your asset is not damaged while it is under their
care.
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