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Liability

A Liability is something (money) that you owe to another party.

What is a Liability?

Liabilities include such things as loans from banks, from family and from other people. Strictly speaking liabilities include loans of anything, from anyone, where you need to pay it back or return it. If you were to borrow $10,000 from a bank the liability would the outstanding amount that needs to be paid back. As you make payments the amount outstanding (the liability) slowly reduces.

 

Liabilities are recorded for the obvious reason of tracking what you owe others, but also to determine the real value of your equity as assets are not a true reflection of net worth.

Different Types of Liabilities

Various types of liabilities include items like:

For the majority of cases liabilities will simply be a loan or credit card balance still owed to a financial institution. For companies this gets more complicated and I suggest you learn accounting if this interests you.

How is a Liability Used?

Liabilities have many benefits if used correctly:

Bookkeeping a Liability

Recording a list of your liabilities allows you to see all that you owe at a glance. Although you can probably remember a simple arrangement life gets more complex over time and uncertainty may creep in. Having it written down ensures there's one less thing on your mind, and a written copy is a concise view and therefore can easily be shared with others for discussion and/or negotiation. Also, keeping these values in one place allows for quick reviews and decisions without having to dig through your files.

 

Liability amounts are always recorded with a positive value, e.g. Car Loan $2,200. This makes the mathematics much easier so you don’t have to remember which is positive and which is negative. The equations for equity and others use positive amounts.

 

You may wish to also record in your bookkeeping significant details of the liabilities in the form of notes like: