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 Liabilities 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 a fixed asset of the company for example loans from NBFC has 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
|
Liability |
Debt |
| Liability can be taken from creditors, suppliers banks or financial institutions | Debt is generally taken from Banks, NBFC, and other financial institutions which it can be due in a quarter-monthly, etc. depending on the term sheet from the bank |
| A liability is an economic obligation that can be flexible in nature and is usually paid at the discretion of the business | Debt is a mandatory liability and non-repayment of the same could lead to re-financing and may also hamper the creditworthiness of the company |
| Liability of business includes but not limited to Short-term and long-term loans and bonds payable, accrued wages and utilities, income taxes payable, and other liabilities | Debt is only limited to short-term and long-term loans and bonds payable and might exclude accrued wages and utilities, income taxes payable, and other liabilities. |
| Liability does not have a specific rate of interest associated with it and the payment terms can be flexible in nature | In Debt, there is generally a rate of interest that is associated with debt on which payment is being made and the interest which is being paid is usually monthly cash outflow in nature |
Conclusion
Liability vs Debt is a vital and important part of any business that wants to become an industry leader or manage its 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 tries and make the cash cycle smooth so that no payment of any nature whether current or non-current should clash with 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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