During the normal course of the business, numerous different transactions occur within the firm. All transactions are supposed to be recorded in the financial statements under separate headings.
There are three broad categories in which all classes are categorized, which include assets, liabilities, and equity.
Liabilities include the financial obligations that the business has incurred over time in order to settle its expenses.
This is broadly divided into two distinct categories: Current Liabilities and Non-Current Liabilities.
Current Liabilities are relatively short-term in nature whereas Non-Current Liabilities are long-term.
On the other hand, debt is considered to be a part of liability. Debt is a financial arrangement between an organization and the lender, where the lender generally extends finance to the seller.
A lot of times, liabilities are debts that are assumed to be the same thing.
However, there are certain staunch differences between debts and liabilities that are further described in the table below:
|Debt is considered to be a part of liabilities. Out of all a company’s liabilities, debt is considered a part of the total liabilities. Total Debt is included in the total liabilities, but it is not always the other way around.||Liabilities are broadly used for all the financial obligations of the company. Debt is included as a part of the liability. Liabilities include ALL of the financial obligations of the company, including debt.|
|It mainly arises when a firm borrows money from another party. Debt is taken on when a company explicitly asks another company for financial resources for a particular task or objective.||Generally, liabilities occur as a result of normal operations from the business. They might not always be very significant in nature, but they are normally incurred because of general business activities|
|Debt refers to the amount of money that a company owes to another party. It is mainly between the organization, and a lending organization (in most cases, this is a bank).||Liabilities are defined as financial obligations that the company owes to other organizations against services that have already been provided to the company or the services that need to be provided by the company against which they have already received the payment.|
|Debt is included in the Balance Sheet under a separate heading of Non-Current Liabilities. In the case where debt (or a part of the debt) is payable in the current year, it is categorized as a Current Liability.||Liabilities are included in the Balance Sheet amalgamated. On the right-hand side of the Balance Sheet, Liabilities are mentioned first, underneath which there are different categories that are duly mentioned (including debts)|
|Debt can be short-term and long-term. It can be either of them or none of them. If there is short-term debt, it is categorized as a Current Liability, and if it is a long-term debt, it is categorized as a Non-Current Liability.||Liabilities are always categorized into short-term and long-term liabilities. They need to be presented separately. It is highly unlikely for a company not to have any of the two (i.e. Current and Non-Current Liability)|
|The amount of debt mentioned on the Balance Sheet helps companies calculate gearing or leverage-related ratios.||The number of liabilities that are mentioned on the balance sheet is mainly used for the purpose of liquidity.|
|Debt is not directly a part of the basic accounting equation. It is always clubbed under liabilities and then Total Liabilities are used in order to be used in the basic accounting equation.||All the Liabilities need to be clubbed in order to calculate Total Liabilities.|
|Debt may or may not exist on the Balance Sheet. If a company has no gearing and no long-term loans were taken, this component is removed from the Balance Sheet altogether.||Liabilities are always considered to be part of normal business functioning. It is very unlikely for a business to have no liabilities.|
Therefore, it can be seen that debt and liabilities are similar in terms of their nature and understanding.
As a matter of fact, both have the same accounting treatment. In fact, debt in itself is a part of liabilities, and total liabilities cannot be calculated without incorporating debt.
However, both these components are used hand in hand by stakeholders in order to make decisions on whether to invest in the company or not.