What are "liabilities" in accounting?

Liabilities in accounting refer to the obligations or debts that a company must pay to outside parties in the future. This includes loans, accounts payable to suppliers, mortgages, and other financial commitments that arise during business operations. Understanding liabilities is crucial because they represent the company's financial responsibilities, which are essential in assessing the overall financial health and solvency of an organization.

When companies incur liabilities, they are essentially borrowing resources from creditors with the promise to repay them at a later date. This distinguishes liabilities from assets, which are resources owned by a company that can provide future economic benefits. Investments made by shareholders are classified as equity, not liabilities, and revenue generated from sales refers to the income earned from business operations, separate from debts owed. Recognizing the nature of liabilities helps in making informed financial decisions and managing the company’s obligations effectively.