What is a liability?

By Book Keeping Pros
Sources checked 15 Oct 2026

Definition

A liability is an amount a business owes to someone else, such as an unpaid supplier bill, a credit card balance, wages staff have earned but not yet been paid, or a bank loan. Liabilities appear on the balance sheet, split into current liabilities, due within 12 months, and long-term liabilities, due after that.

Most liabilities arise because the business has received something before paying for it: a supplier delivers goods on account, a lender advances money, or staff have worked days they will be paid for in the next pay cycle. Each kind has its own account, and under double-entry bookkeeping a liability account grows with a credit and shrinks with a debit.

A complete list of liabilities matters as much as a complete list of assets. A bill left out of the books makes the business look better off than it is, and a loan balance never compared with the lender's statement can drift away from the amount really owed. A business credit card needs the same care, since each purchase on the card is owed from the day it is made, not from the day the statement arrives.

Paying off a liability that is already in the books does not change profit. The bank balance and the liability fall by the same amount, and only charges such as interest count as an expense. That is why a business repaying a loan can report a healthy profit and still feel short of cash: repayments of the amount borrowed leave the bank account without appearing on the profit and loss statement. Reading the balance sheet alongside the profit and loss statement explains the gap.

In Australia

business.gov.au describes a liability broadly, as any financial expense or amount owed, and defines a current liability as one due for payment within 12 months. It also defines a contingent liability: one that is paid only if a particular event or circumstance occurs.

Its balance sheet template lists current liabilities, such as credit cards payable, accounts payable, interest payable and accrued wages, separately from long-term liabilities, which are due after a year or more and include loans.

business.gov.au's guide to cash and accrual accounting explains that cash accounting leaves out what the business owes to others, because a supplier's invoice is not recorded until it is paid. Accrual accounting records an expense when it happens rather than when the money moves, so the amounts owed appear in the books. The guide calls accrual the more complicated of the two and suggests talking to a professional if you are unsure which method suits your business.

Worked example

Illustrative example: the liabilities section of a balance sheet at the end of the financial year
Liability	Type	Amount (AUD)
Accounts payable	Current	4,250.00
Business credit card	Current	1,180.00
Accrued wages	Current	2,600.00
Bank loan, due after 12 months	Long-term	15,000.00
Total liabilities		23,030.00

Illustrative example only: these rows show the method and are not sourced data.

Common mistakes

Recording a whole loan repayment as an expense, when the part that repays the amount borrowed reduces the loan balance instead.
Reading the books of a business that uses cash accounting as if they showed everything it owes, when unpaid bills are not recorded until they are paid.
Never checking loan and credit card balances in the books against the lender's own statements.
Recording money borrowed as income, when a loan received is a liability that has to be repaid.
Entering a new loan at the amount approved rather than the amount the lender's statement shows as owing, so the balance is wrong from the first day.

Common questions

Is a liability an expense?

Not in the bookkeeping sense, although the two often arrive together. An expense is a cost of running the business for a period and reduces profit, while a liability is an amount still owed at a given date. Many liabilities arise without an expense: borrowing money creates a loan liability and adds to the bank balance without any cost being recorded. Equally, a cost paid on the spot is an expense that skips the liability stage entirely.

What is the difference between a liability and an asset?

An asset is something the business owns or is owed, such as cash, stock, equipment or money customers have yet to pay. A liability is something it owes to others. Both appear on the balance sheet, and taking total liabilities from total assets gives net assets. The two are often linked: a vehicle bought with finance sits among the assets while the loan used to buy it sits among the liabilities, and the two figures usually change at different rates over time.

What is the difference between a liability and equity?

Both are claims on the business's assets, but of different kinds. Liabilities are amounts owed to others, such as suppliers, lenders and staff, usually on set terms and dates. Equity is the owners' interest in the business: what would be left of the assets once every liability was paid. Profit and money the owners put in add to equity, while losses and amounts the owners take out reduce it. Liabilities move with what the business borrows and owes.

Related terms

Related service

Accounts payable and receivable

Bills and invoices tracked, with you approving every payment.

More about accounts payable and receivable

Sources

Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
Set up a balance sheet
business.gov.au, Australian Government. Current at 15 October 2026, released 18 January 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
Choose between cash and accrual accounting
business.gov.au, Australian Government. Current at 15 October 2026, released 13 September 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.