In its simplest definition, the legal term “liability” actually refers to a fault. A person who committed the “fault” is seen as a person who is liable to the aggrieved party because of the actions he has made or what he hasn’t done.
A good example of liability is what happens when there is a traffic accident. The person who was responsible for the accident – either for an action he made or an action he failed to do – is held liable for the party or parties he has injured or damaged. This is a situation where a liability insurance is important. A liability insurance is able to cover the damage and the expenses that are due to the aggrieved party. This will usually cover the damage to the other party’s vehicle, any damaged party, and also medical expenses for any person injured. There are even liability insurance cover that would reimburse the aggrieved party for any legal expenses or fees if a civil action is needed.
When used in the world of accounting, the term liability would refer to an obligation. It pertains to money that a person owes and is needed in order to consummate a transaction. It also refers to any debt that is not yet paid or products and services that are already paid for but is still not being used. There are actually two types of liability in accounting. Long-term liability refers to any debt that has been paid out for more than a year. A short-term liability is about debts that have been paid in a year or less.