What is a liability?

A liability refers to a financial obligation or debt that one party owes to another. This encompasses any obligation that requires a future payment, which can include loans, mortgages, credit card debts, and other types of financial commitments. Understanding liabilities is crucial for individuals and organizations as they represent claims against assets and impact overall financial health.

For example, when an individual takes out a loan to buy a car, that loan qualifies as a liability since the individual is obligated to repay it. Effectively managing liabilities is essential for maintaining a balanced budget and ensuring long-term financial stability.

In contrast, the other options refer to different financial concepts: assets generate income, available funds relate to liquidity, and measures of investment performance can pertain to returns or growth rates. These concepts are distinct from liabilities, which specifically denote obligations rather than resources or performance metrics.