Liability

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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. It is said, "asset put cash in your pocket, liabilities take cash out of your pocket." The basic accounting equation relates assets, liability, and capital (or equity):

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.

In technical terms, liabilities are: The future sacrifice of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions and other past events. (Statements of Accounting Concepts, AARF, 1997). Regulations as to the recognition of liabilities are different all over the world, but are roughly similar to those of the International Accounting Standards Board (IASB).

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