What is a liability?
It is something you owe.
It is money or debt that is due to someone else. Liabilities are an obligation by law to pay another party for what you owe.
Both a company and an individual can have liabilities.
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These are amounts you owe to banks, creditors, or people and institutions that lend you money.
Personal liabilities can include:
- Car loans
- Educational loans
- Credit card debt
Personal balance sheet
A personal balance sheet calculates your net worth based on what you own (your assets) and what you owe (your liabilities).
This is money that a company owes its creditors and any other claims it has against its assets.
- Accounts payable
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Company’s Balance Sheet.
They are also part of the accounting equation in a company’s balance sheet:
Assets = Liabilities + Stockholders’ Equity
Although they are often viewed as a right to the company’s resources, liabilities can also be thought of as a source of a company’s revenue.
Why are they important?
Liabilities are a crucial part of every business because they are used to grow the business and help pay for expansion.
- In an LLC, or Limited Liability Company, the owners are protected from personal liability for business debts and claims—a feature known as “limited liability,” which means that if the business owes money or faces a lawsuit creditors can’t come after the personal assets of the partners of the LLC.