Liability

Liabilities are financial obligations a person or entity must meet. They include current liabilities(which must be settled within a year) or long term liabilities (which are settled in a year or longer). Liabilities can be debt owed, claims or potential loss.

It is used to keep in mind that the liability side of the balance sheet usually reflects the company or individual’s obligations objectively, while the asset side may or may not hold up in the case of adverse financial circumstances. In a recession, the assets may lose significant value while the liabilities may remain unchanged.

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