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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 that 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, 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.
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 instalments | Debt repayment usually provides an option of payment in instalments. | Liabilities settlement may not provide such an option to the borrower. |
Conclusion
All debts are liabilities, but not all liabilities are debts.
