Liability vs Debt

Difference Between Liability vs Debt

A business has three major components on which every company runs and perhaps that is the most important aspect of any business. There are assets and liability and Shareholders equity. As the accounting equation stands Assets= Liability + Shareholder’s Equity. The right-hand side should balance the left-hand side of the business. Hence Liability is an important aspect of the business. In this Liability vs Debt article, we will try to understand the major differences and the nature of the two. Both liabilities vs debt results in cash outflow and debt is a subset of liability as debt is also categorized as non-current or long-term liabilities. Efficient management of the two is essential for the smooth running of any business.

Head To Head Comparison Between Liability vs Debt (Infographics)

Below is the top 4 difference between Liability vs Debt

Key Differences Between Liability vs Debt

Both Liability vs Debt are popular choices in the market; let us discuss some of the major Difference Between Liability vs Debt

• The major difference between liability vs debt is that debt is generally categorized under non-current in the balance sheet and liabilities are segregated in the balance sheet into current and non-current as well, in fact, the total of every liability is categorized under current and non-current
• Liabilities are generally reduced when Debts are paid-off from the balance sheet, for example, paying off a loan taken from banks or financial institutions reduces the liabilities of the business. On the contrary paying-off, any current or non-current liability does not necessarily mean that the debt of the business will be reduced. Paying off debt interest will reduce the liability of the business, but it does not reduce the debt component or the principal on the debt outstanding of the business
• Debt on the business which is taken by the company is generally secured which is secured against given collateral which is fixed asset of the company for example loan from NBFC have been taken by keeping office building as collateral. On the other hand, Liabilities can be or cannot be secured and current liabilities i.e. liabilities due within one year are always unsecured in nature
• Non-payment of debt due to financial institutions or banks leads to the breach of convents and additional penalty needs to be incurred by the business, on the other hand, non-payment of other balance sheet liability does not always lead to any penalty. For example, non-payment to creditors will not lead to cumulative interest or late payment penalty
• All debts are liabilities but all liabilities are not necessary debt and might not have a nature of debt. In other words, liability is the larger universe and debt is a subset of it

Liability vs Debt Comparison Table

Below is the 4 topmost comparison between Liability vs Debt

Conclusion – Liability vs Debt

Liability vs Debt are a vital and important part of any business who wants to become an industry leader or manage their operations successfully. A good business plan should take into consideration the efficient management of cash outflow which comes from efficient management of debt vs liabilities. A good accountant which try and make the cash cycle smooth so that no payment of any nature whether current or non-current should clash from each other which will result in a decrease of working capital requirement in the business.

A company should make major emphasis on both the terms

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