Difference Between Liability vs Debt

Every business carries out various activities and transactions which are recorded in different financial statements of the company. Business activities that result in transactions are classified under broad headings in financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more like – assets, liabilities, owners’ equity, revenue, expenses, etc.

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In this article, we will look at two elements in a company’s balance sheet, namely – ‘liabilities’ and ‘debt.’

Liability vs. Debt Infographics

Here we provide you with the top 6 differences between Liability vs. Debt.

Liability vs. Debt – Key Differences

The key differences between Liability vs. Debt are as follows –

  • The terms ‘liabilities’ and ‘debt’ have similar definitions, but there is a fundamental difference between the two. Liabilities are a broader term, and debt constitutes a part of liabilities.Debt refers to money that is borrowed and is to be paid back at some future date. Bank loans are a form of debt. Hence, it only arises out of borrowing activities. Whereas, liabilities arising out of other business activities as well. For example, accrued wages are payments to employees that have not been paid yet. These wages are obligations on the company’s part and are categorized as a liability.Liability includes all kinds of short-term and long term obligationsLong Term ObligationsLong Term Liabilities, also known as Non-Current Liabilities, refer to a Company’s financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date). read more, as mentioned above, like accrued wages, income tax, etc. However, debt does not include all short term and long term obligations like wages and income tax. Only obligations that arise out of borrowing like bank loans, bonds payableBonds PayableBonds payable are the company’s long-term debt with the promise to pay the interest due and principal at the specified time as decided between the parties. A bond payable account is credited in the books of accounts with the corresponding debit to the cash account on the issue date.read more constitute as a debt. Therefore, it can be said that all debts come under liabilities, but all liabilities do not come under debts.The debt of a company exists in the form of money. When a company borrows money from a bank or its investors, this money borrowed is considered to be debt for the company. On the other hand, liability does not necessarily have to be in the form of money. Liability can be anything that imposes a cost on the company. Future expenses like salaries to employees or payment to suppliers are liabilities for the companyLiabilities For The CompanyLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more and not debt.

Liability vs. Debt Head to Head Difference

Let’s now look at the head to head the difference between Liability vs. Debt.

Final Thought

Hence, liability and debt are closely related concepts and may be used interchangeably. But as discussed above, there are some critical differences between the two. Liabilities are a broader term, and debt is a type of liability. Liabilities arising out of the company’s daily operations, resulting in an expense or obligation to be fulfilled in the future. Whereas debt only arises when a company borrows money from another party. These are two essential concepts as investors closely monitor how much debt the company owes and what are the future obligations in the form of liabilities that the company has.

This article is a guide to Liability vs. Debt. Here we discuss the top differences between Liability vs. Debt, infographics, and the comparison table. You may also have a look at the following articles –

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