Liabilities: Meaning and Definition
Financial Statements
Explained Simply
Under the IFRS Conceptual Framework, a liability is a present obligation of the entity to transfer an economic resource as a result of past events. Liabilities are shown on the balance sheet and split into current (due within 12 months, such as trade creditors, VAT payable, PAYE owed to SARS and short-term overdrafts) and non-current (due later, such as a long-term bank loan or bond). A liability is not an expense: buying stock on credit creates a liability, and the expense only arises as the stock is used or sold. The accounting equation shows why they matter: assets equal liabilities plus equity. In South Africa, a business with a growing creditors balance and little cash should watch its current liabilities closely.
Related Terms
- Balance SheetA balance sheet is a financial statement that shows a business's assets, liabilities, and equity at a specific point in time, following the equation: Assets = Liabilities + Equity.
- Accounts PayableAccounts payable (also called creditors) is the money a business owes to its suppliers for goods or services received but not yet paid for.
- AssetsAn asset is a resource that a business controls as a result of past events and that has the potential to produce economic benefits.
- CapitalCapital is the money or other assets that the owners invest in a business to start it and keep it running, recorded as part of equity on the balance sheet.