What are liabilities in accounting?

Liabilities in accounting refer to the obligations or debts that a business owes to others, which can include loans, accounts payable, mortgages, and other forms of debt. This definition is essential as it represents a crucial aspect of the accounting equation, which balances assets (what the company owns) with liabilities and owners' equity (what the company owes and the net worth of the business).

Understanding liabilities is critically important for assessing the financial health of a business. They indicate the level of financial leverage and the obligations the business must fulfill, impacting cash flow and financial stability. Properly managing liabilities is key for sustainable operations, as excessive liabilities can lead to financial strain.

In contrast, resources owned by the business refers to assets, owners' equity pertains to the residual interest in the assets of the business after deducting liabilities, and cash available to the business is a specific asset category. Hence, the identification of liabilities as obligations makes it a fundamental relation in the financial framework of a company.