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Singh Arjun

What is the difference between debt and liability?

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1 Answer

  1. This answer was edited.

    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 aspectDebt 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 modeDebt can be repaid back only in cash.Liabilities other than debt can be settled by rendering goods or services or by paying cash.
    3. OccurrenceDebt 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 agreementDebt 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. UtilizationDebt helps entities for business expansion and diversification.Liabilities help entities conduct their daily business functions and processes.
    6. Interest paymentThe 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 installmentsDebt 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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