Glossary
Liability
An amount the business owes to someone else and will have to settle in future.
What it means
A present obligation of the business arising from past events, the settlement of which is expected to result in an outflow of resources.
Example
A bank loan and money owed to a supplier (a trade payable) are both liabilities.
Why it matters
Liabilities are claims against the business's assets. An increase in a liability is a credit.
In practice
Liabilities are credit balances. They appear on the statement of financial position below capital. Non-current liabilities are due after more than a year, such as a bank loan. Current liabilities are due within a year, such as trade payables and a bank overdraft.
Imagine a business buys inventory worth RM800 on credit from a supplier. Inventory (an asset) is debited RM800 and the supplier's account (trade payables) is credited RM800. When the business later pays, trade payables is debited and cash is credited. The liability is gone.
Students often confuse a liability with an expense. A liability is an amount still owed at the reporting date. An expense is a cost already used up and shown in the income statement. Owing RM800 for goods is a liability; the interest charged on a loan is an expense. Mixing them up overstates or understates what the business owes.
If liabilities and expenses still blur together in your answers, one of our teachers can work through a few examples with you until the difference is clear. Book a trial class.
Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 1.2 The accounting equation (page 11).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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