How It Works
A liability is a claim on a company's assets. Technically, a liability is a required transfer of assets or services that must occur on or by a specified date as a result of some other event that has already occurred.
For example, let's assume that Company XYZ borrows $10 million from Bank ABC. Because the loan is not due for five years, Company XYZ records the portion of the loan that is not due in the next 12 months as a long-term liability. The part that is due in the next 12 months, however (let's say it's $145,000), is recorded as a current liability.
It is important to note here that although debt commonly comes to mind when one considers liabilities, not all liabilities are debt. Companies may incur several other types of current liabilities, including (but not limited to) upcoming payroll, bonuses, legal settlements, payments to vendors, certain derivatives, contracts, certain types of leases and required stock redemptions. The key threshold, however, is that those amounts must be due within in the next 12 months.
