What is the Difference Between Liabilities and Debt (Debt vs Liabilities)?
You must be heard the words debt and liabilities. They both are very familiar with each other. If you want to achieve financial success, and want to improve your financial status, then it is important to understand these two words. In this blog, we are going to discuss what is the difference between Liabilities and debt.
Debt and liabilities may appear and have the same meaning, but they are two different things. Debt majorly refers to the money you borrowed, but liabilities are your financial responsibilities.
What is Debt?
Debt represents the amount of money borrowed from an individual, a corporation, or an organization. the debt is to be paid back is called the interest. The arrangement for debt payback varies from an individual or organization to the other. This charge is always called the interest, and it is always calculated in terms of the percentage of the principal money received. Debt is always negative in a business because it allows others to have a claim of your profit in a case where you run a business.
What are Liabilities?
Liabilities can be explained as your obligations, debts, and things that take money from you. Generally, liabilities can be defined as something that decreases the value of something or reduces something of value such as money, peace, happiness, security, confidence. Something that weakens you either mentally or financially, something that takes you far from achieving your goal, provides negative stress, creates tension and anxiety, and reduces your health and productivity.
Examples of Liabilities
- Accounts payable
- Loans or notes payable
- Accrued expenses payable
- Deferred revenues
- Bonds payable
- Income taxes payable and deferred income taxes
|Definition||Any money or service that the company owes to another individual or party||Similar to liabilities, the term debt also refers to an amount of money that a company owes to another party|
|How does it arise?||1. Liabilities of a company arise due to its financial obligations that occur while conducting business.2. Businesses have to raise funds to buy assets, and liabilities are a result of a business’ fundraising activities.||1. The debit arises when a company raises funds by borrowing from another party. This debt is to be paid back at a future date, along with an interest amount.2. Hence, debt can also be defined as a type of liability. Many companies raise debt for financing large purchases.|
|Where are they recorded on a balance sheet?||Liabilities are recorded on the right-hand side of the balance sheet and include various elements under it.||Debt is a type of liability. Hence, it is also recorded on the right-hand side of the balance sheet|
|Sub-categories||In the balance sheet of a company, liability appears under two sub-categories, namely, current liabilities or short term liabilities and non-current or long term liabilities.||Similarly, there is short-term debt (which shows under short-term liabilities) and long-term debt (shows under long-term liabilities).|
|Ratios||Liquidity ratios help us measure the ability of the company to pay its short term as well as long term obligations||Leverage ratios or debt ratios measure the debt levels of the firm. These ratios help assess how much the firm is dependent on debt. It also helps us understand the firm’s ability to meet its financial obligations.|