Final answer:
Liability is a legal obligation or debt that a party owes. In the context of corporations, shareholders have limited liability which is confined to their investment in the company. Liabilities are recorded on a balance sheet, which also shows assets, with the difference between them called equity.
Step-by-step explanation:
Liability refers to a legal obligation or debt that an individual or entity owes. In business terms, when we talk about a corporation, it is an entity that is owned by shareholders who have limited liability for the company's debts. This means that the shareholder's liability is limited to the amount they have invested in the corporation. However, they share in the profits of the company potentially through dividends.
On a balance sheet, liabilities are listed alongside assets. An asset is something of value that the entity owns, like cash or real estate, which can be used to produce income or can be liquidated to settle debts. The difference between the value of the assets and the liabilities is known as equity. In the context of a homeowner, equity would be the monetary value left after selling the property and paying off any mortgages.
In financial management, managing both assets and liabilities is crucial. For banks, their balance sheet operates similarly, where they have to manage their assets such as cash and loans to others against their liabilities like the money they owe to depositors or other institutions.