Liability

Liability can have a legal meaning and a financial meaning. In law, liability means legal responsibility. Buyers often try to transfer liability to suppliers, and suppliers often seek to limit their liability. For example when engaging an IT supplier to design and implement a firewall to protect sensitive data, the buyer may wish to make the supplier liable if the firewall doesn’t work. However, few suppliers will accept unlimited liability, as they would not wish to accept liability, in the event, for example, of hackers penetrating the firewall. If the buyer insisted on unlimited liability, this would affect the number and type of bidders who would respond. In accounting, a liability is a present obligation that stems from past transactions and which, when settled, will result in expenditure. For example, if the firewall was designed, produced and commissioned for $50,000 plus 10% support per annum, the provider’s invoice would create a liability for the initial supply and commissioning, and the ongoing support would create annual liability for this service.