TL;DR
A liability is something you owe, like a debt or obligation.
Full definition
A liability in financial terms refers to any legal obligation or debt a company or individual owes to another entity. This can include loans, accounts payable, mortgages, deferred revenues, and other financial commitments. Liabilities are recorded on the balance sheet and are classified as either current (due within one year) or long-term (due after one year).
Why it matters
Understanding liabilities is crucial because they represent a company's financial obligations, impacting its overall financial health and stability. By managing liabilities effectively, a company can maintain good credit, ensure liquidity, and avoid financial distress. For individuals, understanding liabilities helps in managing personal debt and financial planning.