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Main Dictionary L

Liability

Liability is the term used to describe a need to fulfill a debt, provoked by internal or external circumstances.

Liability explained

In the process of carrying out financial and economic activities, any enterprise has liabilities, which entail the obligation to pay a certain amount of money. Liabilities arise due to the establishment of contractual relations of a different nature, the conclusion of which is necessary for the effective production process at the enterprise, as well as due to the execution of legal norms.

An attribute of an liability is the fact that in the performance of this obligation, the organization has an outflow of financial resources (or other resources) or the replacement of one type of liability with another. It is this characteristic that distinguishes liabilities of the company from its assets, which, on the contrary, imply an inflow of funds into the company.

The repayment of a liability by an organization implies the withdrawal of debt to business entities or third parties, which in this case are creditors. In some cases, liabilities are referred to as accounts payable, but the concept of "liability" has broader boundaries and includes other types of liabilities in addition to accounts payable.

Subjects of Liability

The parties of the liability are the creditor and the debtor.

Debtor is a person who is obliged to do or not to do something for the benefit of another person or persons (creditors). If the debtor does not fulfill his/her liability he/she is subject to a legal punishment.

Creditor is a person in whose favor a liability is performed.

Classification of Liabilities

All liabilities of the organization can be classified according to various characteristics:

  • by subjective feature;
  • by affiliation;
  • by urgency;
  • by size.

Depending on to whom the organization owes debts, liabilities can be divided into three types: towards the owners on initial contributions to the authorized capital, as well as those formed in the course of business activities (reserve or additional capital, retained earnings); towards the company's personnel on the wages and salaries; towards third parties (contractors, governmental authorities, credit institutions and other business entities).

Depending on who owns the liability, they are subdivided into own and borrowed. Own capital is not repaid in the process of carrying out activities by the enterprise; borrowed capital which is repaid in certain terms in the process of carrying out activity.

According to urgency, liabilities can be divided into short-term (with a maturity of not more than 12 months) and long-term liabilities (with a maturity of more than 12 months).

Liabilities can be also splitted according to the certainty of size: liabilities for which the amounts of payments are known in advance (contributions under credit agreements of banks, payments under contracts with suppliers and contractors) and estimated liabilities for which the amount of payments is unknown in advance and depends on certain conditions (on pending legal proceedings, on warranty, on measures related to the restructuring of the enterprise).

Pecuniary Liability

Pecuniary liabilities are obligations that have the characteristic of succession, that is, they pass from the previous owner to the new one. 

In the countries of the Romano-Germanic family of laws easements are usually used to establish restrictions on the rights of the owner of the real estate. In Anglo-Saxon law other institutions are also used. For example, in Great Britain covenants are used to regulate relations both between private property owners and between private property owners and public authorities. 

They are included in contracts of sale and purchase, lease agreements, and agreements on the development of the territory. By virtue of the principle of the privity of contract, a common law agreement or covenant clause can be opposed to a party to the contract, even if the property encumbered by it is alienated to a third party.

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