A liability is something a company owes and expects to settle using economic resources. On the balance sheet, liabilities combine with shareholder equity to account for assets. section 2.1.2
Assets = Liabilities + Shareholders’ equity
Use the accounting equation to relate what a company owns, owes, and would return to shareholders after liquidation. section 2.1.2
Interpret liabilities alongside solvency and liquidity:
- Treat liabilities exceeding assets as a possible sign of serious financial trouble. section 2.1.2
- Separate solvency from liquidity: a company can have a positive balance sheet yet lack enough liquid assets to pay its bills. section 2.6
- Use debt ratios to assess leverage by comparing debt with assets, preferably against companies in the same industry. section 2.6
Ownership versus obligation
A factory and its machinery may count as assets but take time to sell; inventory may convert to cash more easily. This distinction matters when judging whether liabilities can be settled. section 2.1.2
