Liability vs Debt
Liability and debt are related concepts that are important to understand. At a personal level, an individual may take a loan from a bank to construct a home for his family or to buy a car. He repays this money in installments, and this loan is considered a debt of the person. He also has liabilities towards his family members such as kids and wife as well as aged parents whose requirements he needs to fulfill. At first glance both debt and liability appear to be same, but if you take a closer look, there are many differences that will be enumerated in this article, particularly in respect of businesses and companies where these terms are commonly used in financial statements.
As described above, if a company has taken loans from banks or individual investors in the form of bonds or mortgages, these are considered as debts that need to be repaid along with interest. The liabilities of a company also need to be serviced, but they are not just debts. A liability is something that a company owes to someone like accounts payable. If a company buys raw material and has to pay pack the supplier in 30 days, it is the liability of the company as the company has received the benefit (raw material) and has to pay for it. At a personal level, paying your tutor for all the coaching he has given in a month is your liability. At a psychological level, looking after emotional, physical and material needs of your spouse are your liabilities.
In a company, expenses that have accrued are also considered a liability. Your employees have worked for a month, and it is your liability now to pay their monthly salaries. Unearned revenues are another example of liability. The best example of this kind of liability is prepaid card for a mobile where you pay in advance when you buy a recharge coupon and it is the liability of the company to provide your mobile services for the period for which the coupon is valid.
Liability is a past event that is likely to result in a cash outflow in near future from a business. There are many types of liabilities as described above, and debt is certainly one of them.
What is the difference between Liability and Debt?
• Debt is a sub category of liabilities.
• Debt is always in the form of money, whereas liability is anything that costs a business money
• Debt is always more serious than liability
• All debts are liabilities, but not all liabilities are debts