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.
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.
Worked example
| 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 | 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.
Related terms
Related service
Accounts payable and receivable
Bills and invoices tracked, with you approving every payment.
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.