There are at least two ways that the term "liability" may
be used. One is a legal term and one is an accounting
term.
As a legal term, liability refers to the
responsibility that a firm has for the consequences of its actions. For example, if a
firm's products cause users to be injured, the firm would have liability for that. In
this way, then, liability refers to legal
responsibility.
As an accounting term, liabilities are
essentially debts. A firm would incur a liability when it borrowed money to expand its
plant. It would similarly incur liabilities when it made promises about the pensions
that it would pay to retired workers. These are payments that a firm is legally bound
to make at some point in the future.
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