Liability is a legal obligation of an individual or a business entity towards creditors

arising out of some transactions. A more clear-cut definition of liability signifies it as

a claim by the creditors against the assets and legal obligations of an individual or
entity resulting from the past or current transactions and events.
Liabilities imply a duty or responsibility to pay on demand or on an occurrence of
certain transaction or event. Liabilities also arise from borrowings which may be
made to improve business or personal income and are paid back over an agreed
period of an interval, which may be of the short period or long period.
Liabilities are mentioned on the left-hand side of a Balance Sheet below Equity
Capital. Just like assets, liabilities are also represented in a sequence in the Balance
Sheet. Liabilities are grouped and classified according to their nature and time
period. Some common types of liabilities include current liabilities, long-term
liabilities and contingent liabilities. Let us have a look at them:
Current Liabilities or Short Term Liabilities
Liabilities which are normally due and payable within one year are grouped
as current liabilities. These liabilities are also known as short-term liabilities as they
become due within a shorter period (say within 1 year). Creditors, salaries and
wages payable, gratuity or bonus payable, interest payable, bills payable, sundry
creditors, bank overdraft or cash credit, unclaimed dividends, pre-received incomes,
sales tax payable, income tax payable, provisions, other taxes payable, accrued
expenses, instalments due within 1 year for term loans, etc. are all examples of
current liabilities.
Long Term Liabilities
Liabilities which are not immediately due but become due after a year or more are
classified as long-term liabilities. Long term bank loans like term loans, debentures,
deferred tax liabilities, mortgage liabilities (payable after 1 year), lease payments
examples of long-term liabilities. Interest payable is also treated as the long-term
liability if interest is payable on maturity.
Contingent Liabilities
Certain liabilities are payable on the occurrence of some event or contingency.
Contingency signifies something which may or may not take place. If a liability is
due on happening of such an event, it is termed as the contingent liability. Default
in supply, breach of contract, damage to the environment or to the prestige of some
person or entity, an outcome of accidents and other law-suits, are examples of
some such cases where a liability is contingent to occur. Such liabilities are
calculated on the basis of what if the actual loss occurs where ever possible and
with an addition of a notional calculation of damage occurred to the person or
entity. Generally, these liabilities are not included in the Balance Sheet but are
mentioned separately as a note to the balance sheet.