In accounting, what does "liability" mean?

In accounting, "liability" refers to a company’s obligations to settle debts. This encompasses any legal or financial responsibilities the company has, such as loans, accounts payable, mortgages, or any other forms of debt that it needs to pay back in the future. Liabilities are a critical aspect of a company’s balance sheet and represent what the company owes at a given point in time. They help in understanding the financial health of a company, indicating how much of its resources are tied up in obligations as opposed to assets that can be used for operations or growth.

Other options, while related to accounting concepts, do not define liability accurately. For instance, the concept of assets relates to what a company owns rather than its obligations, and income relates to earnings rather than debts. Capital invested by shareholders relates to equity, which contrasts with liabilities since it pertains to ownership rather than what the company owes. Thus, understanding liability is pivotal for assessing both financial commitments and overall leverage within a business.