Financial liability definition
A financial liability is an obligation that a company or individual has to pay for or deliver. Examples include bank loans, leasing agreements, other payables, and interest-bearing financial liabilities.
Financial liabilities get classified into two main types based on the period they become payable: current liabilities and non-current liabilities.
Current liabilities are typically payable within 12 months from the time of receipt. Examples include salaries, monthly utilities, and rent due.
Non-current liabilities are due for payment after 12 months. For instance, if a debt is payable over 5 years, then the amount owed after one year would be classified under long-term liabilities.
What are financial assets and liabilities?
Financial assets are valuable, while liabilities are not. Assets create a monetary value for a company, while liabilities can negatively affect the firm’s overall value.
However, both assets and liabilities help all businesses function. Assets can provide liquidity for a business because they can get used as collateral. These can include cash, accounts receivable, stock inventory, property, machinery, and equipment.
Meanwhile, liabilities can provide finance for project development, inject cash flow into a business and opening additional business opportunities.