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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 is the money borrowed by a business entity that is to be repaid to the moneylenders at a future specified date.
- Term loans accepted from a bank or financial institutions for business expansion
- Car loan, Home loan, Education loan
Liability is an obligation to render goods or services or an economic obligation to be discharged off at a future date.
- 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, the 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.
|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 instalments||Debt repayment usually provides an option of payment in instalments.||Liabilities settlement may not provide such an option to the borrower.|
All debts are liabilities, but not all liabilities are debts.