Liabilities Definition Accounting

Here we will study about What are Liabilities or Liabilities Definition In Accounting.

Liabilities Definition

Liabilities are the debts due payable by the business to outsiders of the business. Examples are Accounts Payable, Accrued Expenses, Notes Payable, Unearned Commission, Banks Loans, etc. Liabilities include Current Liabilities And Lon-Term Liabilities or Non Current Liabilities.

Liabilities in Accounting plays an important role as it provides Sources of Finance to the business in order to operate the business effectively. Business needs Credit from time to time to operate the business and also for launching many successful projects, the credit is needed to avoid time loss and repay the loan when the company generate revenues from that project within the specified time period set in the agreement between Company and Creditors or Banks or other Financial Institutions.

The Favourable Balance or Normal Balance for Liabilities is Credit Balance while Debit Balance is Unfavourable or Negative Balance. When Liabilities increase, then we Credit it and when Liabilities decrease, then we Debit it. Liabilities are recorded on Balance Sheet on Liabilities & Equity Side Under Liabilities Section. Liabilities are not record in Income Statement or Profit And Loss Account.

 Liability Accounting Journal Entry

When the liability is created, then following Accounting Journal Entry is recorded in the Journal of Company in case of any liability whether it is a Current Liability or Non Current Liability:

             Purchases a/c / Cash a/c / Bank a/c 

                                  

                                      Liability a/c (Accounts Payable, Bank Loan, etc.)

                          (Goods Purchased From Accounts Payable or Loan Taken From Bank)

When Liabilities are repaid to Creditors or Banks or Financial Institutions, then following reversal of above Accounting Journal Entry is passed in the Book of Company as shown below:

  Liability a/c (Accounts Payable, Bank Loan, etc.)

                                                      

                                                           Purchases a/c / Cash a/c / Bank a/c

(Cash Paid To Accounts Payable or Bank For the Goods Purchased or the Amount of Loan)

 

Liabilities can be calculated from the Accounting Equation:

Liabilities = Assets - Owner’s Equity

So, it is all about Liabilities Definition and Meaning In Accounting.