Accounting

Liability

A liability is an outstanding payment obligation: a mortgage, personal loan, consumer credit, card balance or debt owed to someone else.

A liability is valued at its outstanding principal, not the sum of future instalments: those instalments include interest that hasn't accrued yet, which would artificially inflate the debt.

In double-entry bookkeeping, each loan instalment splits into principal repayment (reduces the liability) and interest (an expense for the period).

Related terms

Asset — An asset is anything of economic value you own: cash, investments, real estate, vehicles or loans made to others.
Extra mortgage payment — An extra mortgage payment is money applied to a loan ahead of schedule to reduce the outstanding principal early, choosing between shortening the term or lowering the instalment.
Amortizing loan — An amortizing loan (level-payment schedule) is a repayment method where the instalment stays constant while, within it, the interest portion shrinks and the principal portion grows over time.

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Educational content. netclariq does not provide financial, investment, tax or legal advice.