In financial terms, what does "liability" refer to?

In financial terms, a "liability" refers to a financial obligation that a person or entity owes to another party. This can include debts, loans, mortgages, or any other obligation that requires the transfer of economic benefits, typically money, in the future. Liabilities are recorded on the balance sheet and represent claims against the assets of the business or individual.

Understanding liabilities is crucial because they impact financial health and can affect decisions such as spending, saving, and investing. Evaluating liabilities helps in assessing risk, as higher liabilities relative to assets may indicate financial strain. For individuals, managing liabilities effectively is key to maintaining a stable financial situation and achieving long-term financial goals.