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    In the business world, the terms "Debt" and "Liability" are used interchangeably and are understood to be the same. But in reality, they differ. Debt Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date. For Example, Term loans acceptedRead more

    In the business world, the terms “Debt” and “Liability” are used interchangeably and are understood to be the same. But in reality, they differ.

    Debt

    Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date.

    For Example,

    • Term loans accepted from a bank or financial institutions for business expansion
    • Car loan, Home loan, Education loan

    Liability

    Liability is an obligation to render goods or services or an economic obligation to be discharged off at a future date.

    For Example,

    • Outstanding payment to suppliers of raw materials
    • Outstanding Expenses – accrued rent, outstanding professional fees, outstanding electricity expenses, unpaid salary, etc
    • Income received in advance – rent received in advance, commission received in advance, etc
    • Bills payable
    • Debts accepted by an entity

    Key differences between Debt and Liability

    Now, let me help you understand the differences between the two terms discussed above, debt and liability.

    Particulars

    Debt

    Liability

    1. Narrow/Broad aspect Debt is an integral part of liability. It is a type of liability. Liability is a broader term and it includes debt and other payables.
    2. Repayment mode Debt can be repaid back only in cash. Liabilities other than debt can be settled by rendering goods or services or by paying cash.
    3. Occurrence Debt does not arise on a daily basis. It results only when an entity borrows money from another party. Other liabilities arise during the course of the day to day operations of the business.
    4. Formal agreement Debt involves a formal agreement between the borrower and the lender. Liabilities apart from debt may not involve such a formal agreement between the parties.
    5. Utilization Debt helps entities for business expansion and diversification. Liabilities help entities conduct their daily business functions and processes.
    6. Interest payment The repayment of debt involves payment of interest along with the principal amount. Discharge of other liabilities may not involve payment of interest along with the actual amount of liability.
    7. Option of installments Debt repayment usually provides an option of payment in installments. Liabilities settlement may not provide such an option to the borrower.

    Conclusion

    All debts are liabilities, but not all liabilities are debts.

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