What is meant by "liability" in a business context?

In a business context, "liability" refers to a legal responsibility or debt that a business has. This can encompass a wide range of obligations, such as loans, unpaid invoices, or any other financial commitments that the entity must fulfill. Liabilities are recorded on the balance sheet and are crucial to understanding a company's financial health. They represent what the company owes to external parties, contrasting with assets, which are what the company owns.

By recognizing liabilities, businesses can better manage their financial positions, assess risks, and strategize for growth. Understanding this concept is essential for effective financial planning and reporting, as it directly impacts a company’s equity and overall stability.