Liability Defined

A liability is an existing debt or obligation of a company. It is an amount owed to a third‐party creditor that requires something of value, usually cash, to be transferred to the creditor to settle the debt. Most obligations are known amounts based on invoices and contracts; some liabilities are estimated because the value that changes hands is not fixed at the time of the initial transaction. Liabilities are reported in the balance sheet as current (short‐term) or long‐term, based on when they are due to be paid. Current liabilities are those obligations that will be paid within the next year.