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Wednesday, March 09, 2005

Liability

In the most general sense, a liability is anything that is a hinderance, or puts one at a disadvantage.

In accounting
In accounting, a financial liability is something that is owed to another party. This is typically contrasted with an asset which is something of value that you own. The basic accounting equation relates assets, liability, and capital (or equity) thus: liabilities + equity = assets where assets are what you own, liabilities are what you owe to others, and equity is what you have contributed to the venture.

Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an IOU.
In Investing, what you owe. "Assets put cash in your pocket, liabilities take cash out of your pocket."

In law
In law a legal liability is a term used to describe situations in which a person is liable, for, say, damage to property and is therefore responsible to pay compensation for any damage incurred; liability may be civil or criminal.
In commercial law, limited liability is a form of business ownership in which business owners are legally responsible for no more than the amount that they have contributed to a venture. If for example, a business goes bankrupt an owner with limited liability will not lose unrelated assets such as a personal residence (assuming they do not give personal guarantees). For an explanation see business entity.

An example (from both accounting and law)
Money that you have accumulated is an asset to you. It is something of value that you own. If you take your money to a bank and deposit it there, it becomes a liability to the bank (the bank owes you the money). The money is both an asset to you and a liability to the bank.

Alternatively if, when you take the money to the bank, you store it in a safety deposit box rather than deposit it into an account, the bank has a legal liability (under bailment law) to ensure that your asset is not damaged while it is under their care.

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