Debt Vs Liability
Liability is one of the main components in the accounting equation, it represents the amount which the entity owes to other parties. The entity’s assets can be funded by two sources which are equity or liability. Equity is the owner’s capital plus retained earnings and other reserves. Liability is the amount of money that company owes to bank, supplier, creditor, and other stakeholders.
Liability represents the future obligation of the entity which raise due to the past event such as the purchase of goods or service, exchange asset. For example, a company borrows cash from bank, so it needs to pay it back in the future base on the payment schedule. Company purchased material from suppliers, so it has the obligation to pay base on the credit term.
Liabilities are classified into current and long-term liabilities. Current liability or short-term liability is the current obligation that needs to settle within twelve months from the reporting date. Long-term liability or non-current liabilities are the obligations that will be due in more than a year.
Example of Liabilities:
- Accounts Payable: is the current liability which the company owes to the supplier regarding the purchase of goods or services. It means the company already consume goods or service from a supplier but not yet make any payment.
- Salary Payable: is the amount of salary that company not yet paid to the employee. It happens when company pays its salary on the first week of the new month. So at the end of the month, there will be salary payable.
- Interest Payable: is the amount of interest we owe to the bank or creditor. It happened due to a loan.
- Loan payable: is the money we borrow from the bank and it needs to pay back base on the schedule.
- Dividend Payable: is the balance owe to shareholders which already declare but not yet paid.
Debt is the amount of money company owes to the other entity such as bank and other creditors. It is the future obligation that raises due to borrowing and lending in the past. The company borrows money from other parties to make expand the business. It does not incur due to the daily operation such as the purchase of goods or service.
Debit is the liabilities but not all liabilities are debt. It comes along with the interest that the lender charge to the borrower. It is the compensation that allows the borrowers to use the money.
Debt can short term or long-term, it depends on the payback date. So debt also falls into the current and noncurrent liability. Short-term debt is the current liability that needs to pay within a year. Long-term debt is the non-current liability that needs to pay in more than a year.
Example of Debts
- Bank Loan: Money that company borrows from the bank and needs to pay back both principal and interest in the future.
- Mortgage: Money that an entity or individual borrows to purchase, maintain or repair the real estate.
Difference Between Debt and Liability
|It is the money that company owes to the other party such as supplier, staff, bank, creditor, and so on.
|It is the liability that company borrow from the
|It incurs due to business operations such as the purchase of material, labor, and so on.
|It incurs as the business need money to invest, so we borrow from others.
|Liability covers the debt.
|Debt is just a part of liability.