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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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Before I answer this question of your's it would be beneficial for you to have clarity over the concept of Deferred Revenue. Meaning of a Deferred Revenue Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before renderingRead more
Before I answer this question of your’s it would be beneficial for you to have clarity over the concept of Deferred Revenue.
Meaning of a Deferred Revenue
Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services.
The concept of deferred revenue applies only if an entity follows the Accrual System of Accounting. If the entity follows the cash system of accounting it’s of no relevance as the entire amount received becomes income in the year of receipt.
Whether the Deferred Revenue is a Liability?
The answer to this question is “Yes” it is a liability. Even though you got the answer that it is a liability but I believe a part of the question remains unanswered i.e why is it a liability?
The logic for the same is- Since the entity has already received the amount even before rendering services or delivering goods the entity or a company has a sort of an obligation to deliver the goods or render such services at the predetermined future date. Failing which it may be liable to face legal proceedings or legal actions. Hence, it becomes a liability on a part of the entity to honour such a transaction.
When the entity receives the amount before delivering goods or rendering services that amount is recorded as a “Liability” and once the goods are delivered or services are rendered the liability is reduced and the entity records it as a “Revenue”.
For Example,
In the case of an Educational Institutes like the Universities, Coaching Institutes etc. it charges fees even before the term commences. In such a case the entity has not yet rendered service of imparting education hence, the tuition fees so received shall become a deferred revenue and shall be recorded as a liability at the time of the receipt and at as and when it’s accrued it shall be recorded as revenue.
Journal Entry for the same shall be:
At the time of receipt of Tuition Fees-
And at the time of recording revenue on monthly basis every month-
Deferred Revenue is Presented in the Balance Sheet as –
Conclusion
Deferred revenue at the time of early receipt of the amount is recorded as a liability and at the time of actual income recorded as revenue in the income statement.
Aastha Mehta.
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