In accounting, a liability is technically defined as the future sacrifices of economic benefits that an entity is obliged to make to other entities as a result of a transaction or event.. In layman's language, it simply means the money or assets you are obligated to pay or turn-over-to another party.
Characteristics or examples of financial liabilities
- Any type of borrowing from persons or banks for improving a business or personal income that is payable during short or long time;
- A duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services, or other transaction yielding an economic benefit, at a specified or determinable date, on occurrence of a specified event, or on demand;
- A duty or responsibility that obligates the entity to another, leaving it little or no discretion to avoid settlement; and,
- A transaction or event obligating the entity that has already occurred.
Liability is the legal responsibility for one's acts or omissions. Failure of a person or entity to meet that responsibility leaves them open to a lawsuit for any resulting damages or a court order to perform. In order to win a lawsuit the suing party (plaintiff) must prove the legal liability of the defendant if the plaintiff's allegations are shown to be true. Liability also applies to alleged criminal acts in which the defendant may be responsible for his/her acts which constitute a crime, thus making him/her subject to conviction and punishment.
Types of legal liability
If parties have joint liability, then they are each liable up to the full amount of the relevant obligation. So if a married couple takes a loan from a bank, the loan agreement will normally provide that they are to be "jointly liable" for the full amount. If one party dies, disappears or is declared bankrupt, the other remains fully liable. Accordingly, the bank may sue all living co-promisors for the full amount. However, in suing, the creditor has only one cause of action; i.e., the creditor can sue for each debt only once. If, for example, there are three partners, and the creditor sues all of them for the outstanding loan amount and one of them pays the liability, the creditor cannot recover further amounts from the partners who did not contribute to the liability.
The converse is several or proportionate liability, where the parties are liable for only their respective obligations. A common example of several liability is in syndicated loan agreements, which will normally provide that each bank is severally liable for its own part of the loan. If one bank fails to advance its agreed part of the loan to the borrower, then the borrower can sue only that bank, and the other banks in the syndicate have no liability.
Joint and several liability
Under joint and several liability or all sums, a claimant may pursue an obligation against any one party as if they were jointly liable and it becomes the responsibility of the defendants to sort out their respective proportions of liability and payment. This means that if the claimant pursues one defendant and receives payment, that defendant must then pursue the other obligors for a contribution to their share of the liability.
Joint and several liability is most relevant in tort claims, whereby a plaintiff may recover all the damages from any of the defendants regardless of their individual share of the liability. The rule is often applied in negligence cases, though it is sometimes invoked in other areas of law.
- "Definition and Recognition of the Elements of Financial Statements". Australian Accounting Standards Board. http://www.aasb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf. Retrieved 31 March 2015.
- "Liability (financial accounting) - Wikipedia, the free encyclopedia". https://en.wikipedia.org/wiki/Liability_(financial_accounting). Retrieved 2016-07-15.
- "Legal Dictionary". http://dictionary.law.com/Default.aspx?selected=1151. Retrieved 2016-07-15.