What is an example of a liability?

A liability is a financial obligation that a company owes to external parties, representing debts or obligations that are settled over time through the transfer of economic benefits such as money, goods, or services. Loans payable are considered liabilities because they are amounts that the company has borrowed and is required to repay in the future, usually with interest. This obligation reflects the company's need to generate sufficient cash flow to meet its debt obligations, depicting its financial responsibilities in relation to its creditors.

In contrast, property owned by the company, cash reserves, and equipment owned are classified as assets. Assets provide future economic benefits to the company, whereas liabilities represent claims against those assets by creditors. Understanding this distinction is crucial for evaluating a company's financial health and balance sheet structure.