liability

A liability is anything you owe. All your debts and obligations are liabilities. This includes the balance on your credit cards, the amount you owe on a car or student loans, a mortgage, even an IOU for the $10 you borrowed from a friend. Some liabilities are short term that you pay off within a few months, like a $100 credit card balance.  Others may be long term and paid off over years and years, like a mortgage.  When you defer paying for something until later, you have a liability that represent the future payments you’ll need to make. As you pay it off, the liability will shrink down to where you don’t owe anything anymore and the liability is equal to zero.

Here’s a quick example. If you pay cash for a new TV, you own it outright with no liability. You’ve exchanged one asset (the cash) for another (the TV). But if you buy it on an installment plan, or with a credit card – now you have a liability. You owe the cost of the TV (maybe plus interest, which increases what you owe) to the store or the credit card company. You’ve deferred paying it until later, so now you have a liability to represent those future payments you’ll need to make. As you pay it off the liability will shrink from the total cost of the TV down to where you don’t owe anything anymore, the tv is fully paid off, and the liability is equal to zero.