A liability is a legally binding obligation payable to another entity. Liabilities are incurred in order to fund the ongoing activities of a business.
Examples of liabilities are accounts payable, accrued expenses, wages payable, and taxes. These obligations are eventually settled through the transfer of cash or other assets to the other party.
Liabilities expected to be settled within one year are classified as current liabilities on the balance sheet. All other liabilities are classified as long-term liabilities.