What is a Liability?

Summary

In this video, Thomas Harwood from The Accounting Student explains the concept of liabilities in business accounting. He covers two main types of liabilities: long-term (or non-current) liabilities, such as loans and mortgages, and current liabilities, including short-term loans, bank overdrafts, and accounts payable. The video encourages viewers to actively engage by pausing and listing examples of both types of liabilities. It offers clear definitions and practical examples, making it an easy-to-understand introduction to an essential accounting concept.

Takeaways

• 😀 Liabilities are debts or resources owed by a business to another entity.
• 😀 A business often cannot afford to purchase assets solely with capital, so it uses liabilities to finance its operations.
• 😀 Liabilities are divided into two main types: long term liabilities and current liabilities.
• 😀 Long term liabilities (non-current liabilities) are debts that need to be paid back over a period longer than 12 months.
• 😀 Examples of long term liabilities include long term loans, debentures, and mortgages.
• 😀 Current liabilities are debts that need to be paid back within 12 months or less.
• 😀 Examples of current liabilities include short term loans, bank overdrafts, creditors (accounts payable), and accruals.
• 😀 The video encourages the viewer to pause and write down examples of long term and current liabilities before reviewing the answers.
• 😀 Understanding the difference between long term and current liabilities is important for managing business finances.
• 😀 The video promotes interactivity, urging viewers to engage and think critically about the content presented.
• 😀 Viewers are encouraged to like, comment, and subscribe for more content from The Accounting Student.

Q & A

What is the definition of a liability in accounting?

A liability is a resource that is owed to another entity, and in the context of a business, it is considered a debt.

What are the two main types of liabilities?

The two main types of liabilities are long-term liabilities (also called non-current liabilities) and current liabilities.

What is the difference between long-term liabilities and current liabilities?

Long-term liabilities are debts that are due to be paid back in a period longer than 12 months, while current liabilities are debts that must be paid back within 12 months or less.

Can you provide examples of long-term liabilities?

Examples of long-term liabilities include long-term loans from banks or other institutions, debentures, and mortgages.

What are current liabilities?

Current liabilities are debts of a business that are due to be paid back within 12 months or less.

Can you list some examples of current liabilities?

Examples of current liabilities include short-term loans, bank overdrafts, creditors (accounts payable), and accruals (unpaid bills and expenses).

What is the purpose of pausing the video in the script?

The purpose of pausing the video is to encourage the viewer to actively engage by thinking of and writing down examples of long-term and current liabilities.

Why does the video encourage viewers to write down liabilities?

The video encourages viewers to write down liabilities to help reinforce learning through active participation and to check their answers against those provided in the video.

What is a 'debenture' as mentioned in the video?

A debenture is a type of long-term debt instrument that a company issues to raise capital, often backed by the company’s assets.

Why are accruals considered current liabilities?

Accruals are considered current liabilities because they represent bills and expenses that are due within a short period, typically within 12 months, but have not yet been paid.