Hello guys, welcome to Kho Academy. Guys, in this video, we'll be talking about a very repeatedly asked question and that is what is the difference between a liability and a debt? So to start off, remember that debt is a subset of liability. Liability is a bigger thing and debt is just a portion of liability.
It's a subset of liability. Now, let's first... Let's read...
read these definitions the definition the differential and then i will elaborate to you with different examples and how they are different and how they are similar so liabilities encompass all of one's financial obligations so if it is anything that is any sum of amount that you have to pay to somebody that is you have a financial obligation towards somebody for example a company has to pay a hundred thousand dollars to to X to Mr. X, then that is a financial obligation. You have to pay somebody. Okay, so that is a liability if you have to pay somebody something some money Whereas debt is only those obligations associated with outstanding loans. So debts are very specific in nature Okay, but debts are also something that is their financial obligations For example, if you have taken a loan from bank of $100,000, then that is also a financial obligation.
You have to pay it But it's different from liabilities because liabilities include other things also. For example, if you have incurred some expenses, for example, if you bought some goods from a supplier, but you haven't paid that supplier, or for example, you bought the goods for $5,000 from a supplier, but you haven't paid it, you will pay him in the future. So that is also a financial obligation and hence is a liability. That is not debt. Debt is something which you, a loan which you take from a bank to finance your projects.
or to finance your working capital requirements and that that that has special contractual obligations to it you you pay interest on that whereas on liabilities well liabilities are a bigger thing and when when when liability when we're talking about liability and when we are talking about its subset called debt then you have to pay interest but on other liabilities like when you have to pay your supplier trade creditors or you have to pay the pay the tax for example for either at the year end you have a tax liability but you haven't paid it then that is also a financial obligation towards the tax authority so that is also a liability and one thing one similarity is that both the debt and the liabilities they are financial obligations that have resulted as a result of past events okay something has happened in the past and as a result of that you have to settle those financial obligations okay for example you and of course another thing is that they will result in future outflow of economic resources so three definition three three things something has happened in the past for example you have to pay back the pay back the your debt to the bank what has happened in the past well you signed a contract and you took a loan from the bank and let's suppose you have to pay your pay a certain sum of money to your creditors now what has happened already is that you you bought goods on credit so something has happened already in the past and it will result in the future outflow of economic resources for example when you will pay back the bank the loan or you will pay back your creditors or you will pay the tax payable in the future there will be outflow of each economic resources that is you have to pay cash to them so that's the different and moreover both the liabilities and the debt will have to be reported in the balance sheet as a liability why because balance sheet consists of two parts one is asset asset part and that assets is essentially what a business owns and the second part is equity and liabilities part that is basically how those assets are financed for example you know if you have assets of hundred dollars and your your equity is thirty dollars then that means that seventy dollars of of those assets is financed by your liabilities so once again liabilities are a bigger thing that is only a type of liability okay i hope this this this explanation clarified your concept a bit and if you do like the channel do subscribe and you can also check amazing playlist in my channel thank you